e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
FOR ANNUAL AND TRANSITION
REPORTS
PURSUANT TO SECTIONS 13 OR
15(d) OF THE
SECURITIES EXCHANGE ACT OF
1934.
|
|
|
(Mark One)
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the fiscal year ended
December 31, 2008
|
or
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the transition period from
to
|
Commission file number:
001-31279
Gen-Probe
Incorporated
(Exact name of registrant as
specified in its charter)
|
|
|
Delaware
(State or other jurisdiction
of
incorporation or organization)
|
|
33-0044608
(I.R.S. Employer
Identification Number)
|
|
|
|
10210 Genetic Center Drive, San Diego, CA
(Address of principal
executive office)
|
|
92121-4362
(Zip Code)
|
Registrants telephone number, including area code:
(858) 410-8000
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
Title of Each Class
|
|
Name of Each Exchange on Which Registered
|
|
Common, par value $0.0001 per share
|
|
Nasdaq Global Select
|
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
|
|
|
|
Large
accelerated
filer þ
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting
company o
|
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
As of June 30, 2008, the last business day of the
registrants most recently completed second fiscal quarter,
the aggregate market value of the registrants common stock
held by non-affiliates of the registrant was approximately
$2.2 billion, based on the closing price of the
registrants common stock on the Nasdaq Global Select
Market on that date. Shares of common stock held by each officer
and director and by each person who owns 10 percent or more
of the outstanding common stock have been excluded because these
persons may be considered affiliates. The determination of
affiliate status for purposes of this calculation is not
necessarily a conclusive determination for other purposes.
As of February 13, 2009, 52,336,758 shares of
registrants common stock, $0.0001 par value, were
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Companys definitive Proxy Statement to be
filed with the Securities and Exchange Commission within
120 days after the close of the fiscal year are
incorporated by reference into Part III of this report.
GEN-PROBE
INCORPORATED
TABLE OF CONTENTS
FORM 10-K
For the Year Ended December 31, 2008
INDEX
i
PART I
TRADEMARKS
AND TRADE NAMES
ACCUPROBE, AMPLIFIED MTD, APTIMA, APTIMA COMBO 2, DTS,
GASDIRECT, GEN-PROBE, LEADER, PACE, PANTHER, PROGENSA, SB100,
TIGRIS and our other logos and trademarks are the property of
Gen-Probe Incorporated. PROCLEIX and ULTRIO are trademarks of
Novartis Vaccines & Diagnostics, Inc., or Novartis.
VERSANT is a trademark of Siemens Healthcare Diagnostics, Inc.,
or Siemens. All other brand names or trademarks appearing in
this Annual Report on
Form 10-K
are the property of their respective holders. Use or display by
us of other parties trademarks, trade dress or products in
this Annual Report does not imply a relationship with, or
endorsement or sponsorship of, us by the trademark or trade
dress owners.
FORWARD-LOOKING
STATEMENTS
This Annual Report and the information incorporated herein by
reference contain forward-looking statements that involve a
number of risks and uncertainties, as well as assumptions that,
if they never materialize or if they prove incorrect, could
cause our results to differ materially from those expressed or
implied by such forward-looking statements. Although our
forward-looking statements reflect the good faith judgment of
our management, these statements can only be based on facts and
factors currently known by us. Consequently, forward-looking
statements are inherently subject to risks and uncertainties,
and actual results and outcomes may differ materially from
results and outcomes discussed in the forward-looking statements.
Forward-looking statements can be identified by the use of
forward-looking words such as believes,
expects, hopes, may,
will, plans, intends,
estimates, could, should,
would, continue, seeks or
anticipates, or other similar words (including their
use in the negative), or by discussions of future matters, such
as the development of new products, technology enhancements,
possible changes in legislation and other statements that are
not historical. These statements include, but are not limited
to, statements under the captions Business,
Risk Factors, and Managements Discussion
and Analysis of Financial Condition and Results of
Operations, as well as other sections in this Annual
Report. You should be aware that the occurrence of any of the
events discussed under the heading
Item 1A Risk Factors and elsewhere
in this Annual Report could substantially harm our business,
results of operations and financial condition. If any of these
events occurs, the trading price of our common stock could
decline and you could lose all or a part of the value of your
shares of our common stock.
The cautionary statements made in this Annual Report are
intended to be applicable to all related forward-looking
statements wherever they may appear in this Annual Report. We
urge you not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Annual
Report.
ABOUT
THIS ANNUAL REPORT
This Annual Report includes market share and industry data and
forecasts that we obtained from industry publications and
surveys. Industry publications, surveys and forecasts generally
state that the information contained therein has been obtained
from sources believed to be reliable, but there can be no
assurance as to the accuracy or completeness of included
information. We have not independently verified any of the data
from third-party sources nor have we ascertained the underlying
economic assumptions relied upon therein. While we are not aware
of any misstatements regarding the industry and market data
presented herein, the data involve risks and uncertainties and
are subject to change based on various factors.
Overview
We are a global leader in the development, manufacture and
marketing of rapid, accurate and cost-effective nucleic acid
probe-based products used for the clinical diagnosis of human
diseases and for screening donated human blood. We also develop
and manufacture nucleic acid probe-based products for the
detection of harmful organisms in the environment and in
industrial processes. We market and sell our clinical diagnostic
products in the
1
United States directly and outside the United States primarily
through distributors, as well as through our direct sales force,
and we also market and sell our other products through
collaborative partners.
Founded in 1983, we pioneered the scientific and commercial
development of nucleic acid testing, or NAT. By utilizing
nucleic acid probes that specifically bind to nucleic acid
sequences known to be unique to target organisms, NAT enables
detection of microorganisms that are difficult or time-consuming
to detect with traditional laboratory methods. We have received
United States Food and Drug Administration, or FDA, approvals or
clearances for a broad portfolio of products that use our
patented technologies to detect a variety of infectious
microorganisms, including those causing sexually transmitted
diseases, tuberculosis, strep throat, pneumonia and fungal
infections. We estimate that currently our FDA-approved Procleix
assay for human immunodeficiency virus (type 1), or HIV-1, and
for hepatitis C virus, or HCV, and Procleix West Nile
virus, or WNV, assay are utilized to screen over 80% of the
United States donated blood supply for HIV-1, HCV and WNV. We
have 26 years of nucleic acid detection research and
product development experience, and our products are used daily
in clinical laboratories and blood collection centers throughout
the world. We were awarded a 2004 National Medal of Technology,
the nations highest honor for technological innovation, in
recognition of our pioneering work in developing NAT tests to
safeguard the nations blood supply.
We generate revenues primarily from sales of clinical diagnostic
and blood screening assays that we have developed with our
proprietary technologies. We have also designed and developed,
often with outside vendors, a range of instruments for use with
our assays that we sell to or place with customers. Our clinical
diagnostic products are marketed to clinical laboratories,
public health institutions and hospitals in the United States,
Canada and certain countries in Europe through our direct sales
force of 39 employees. Our blood screening products are
marketed and distributed worldwide by Novartis. In addition, we
have agreements with Siemens (as assignee of Bayer Corporation),
bioMérieux, Inc., or bioMérieux, and Fujirebio, Inc.,
through its subsidiary Rebio Gen, Inc., or Rebio Gen, to market
products in various overseas markets. We also generate revenues
through collaborations with various companies and through
licensing of our patented NAT technologies.
We are developing NAT assays and instruments for the detection
of harmful pathogens in the environment and biopharmaceutical
and beverage manufacturing processes. We have entered into
collaboration agreements with GE Infrastructure Water and
Process Technologies, or GEI, a unit of General Electric
Company, and Millipore Corporation, or Millipore, under which we
will be primarily responsible for developing and manufacturing
assays for exclusive use or sale by our collaborative partners
in specified fields within the industrial testing market.
Millipore launched the first product under our collaboration in
January 2008.
We were incorporated under the laws of the state of Delaware in
1987. In September 2002, we were spun off from Chugai
Pharmaceutical Co., Ltd., our former indirect parent, as a
separate, stand-alone company. Our common stock began trading on
The Nasdaq Global Select Market on September 16, 2002.
We make available free of charge on or through our Internet
website our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission. Our
Internet address is
http://www.gen-probe.com.
The information contained in, or that can be accessed through,
our website is not part of this Annual Report.
Product
Development; Recent Events
We have developed and commercialized what we believe to be the
worlds first fully automated, integrated, high-throughput,
NAT instrument system, the TIGRIS instrument. The TIGRIS
instrument can significantly reduce labor costs and
contamination risks in high-volume diagnostic testing
environments and it also enables large blood collection centers
to individually test donors blood. In December 2003, we
received marketing clearance from the FDA for sexually
transmitted disease, or STD, testing on the TIGRIS instrument
using our APTIMA Combo 2 assay that detects chlamydia and
gonorrhea. The Procleix Ultrio assay for use on the TIGRIS
instrument received approval to apply the Conformite Europeene,
or CE, mark in December 2004, which permitted Novartis to begin
commercialization of the Procleix TIGRIS instrument in the
European Economic Area. In March 2007, the FDA approved the
Procleix TIGRIS system to screen donated blood, organs and
tissues for WNV using the Procleix WNV assay. In May 2007, the
FDA approved the Procleix TIGRIS system for use with the
Procleix Ultrio assay to
2
screen donated blood, plasma, organs and tissues for HIV-1 and
HCV in individual blood donations or in pools of up to 16 blood
samples. In August 2008, the FDA approved the Procleix Ultrio
assay to also screen donated blood, plasma, organs and tissues
for hepatitis B virus, or HBV, in individual blood donations or
in pools of up to 16 blood samples on the enhanced
semi-automated system, or eSAS, and on the TIGRIS instrument.
In January 2008, Millipore commenced commercialization of the
first MilliPROBE assay developed under our collaboration, which
targets the bacterium Pseudomonas aeruginosa and is
designed as an in-process, early warning system to provide
faster, more effective detection of Pseudomonas aeruginosa
in purified water used during drug production. The assay was
designed to ensure a higher degree of water quality throughout
manufacturing processes where the contaminant can be a serious
quality and safety concern. We believe faster detection will
enable biopharmaceutical manufacturers to reduce downstream
processing risks, optimize product yields and improve final
product quality.
In March 2008, we started U.S. clinical trials for our
investigational APTIMA HPV assay. The investigational APTIMA HPV
assay is an amplified nucleic acid test that is designed to
detect 14 types of high-risk human papillomavirus, or HPV, that
are associated with cervical cancer. More specifically, the
assay is designed to detect two messenger ribonucleic acids, or
mRNAs, that are made in higher amounts when HPV infections
progress toward cervical cancer. We believe that targeting these
mRNAs may more accurately identify women at higher risk of
having, or developing, cervical cancer than competing assays
that target HPV deoxyribonucleic acid, or DNA. We expect to
enroll approximately 7,000 women in the trial. Actual
enrollment, however, may vary based on the prevalence of
cervical disease among women in the trial. Trial enrollment and
testing are expected to take approximately two years. The APTIMA
HPV assay is designed to run on our TIGRIS instrument system and
on our future medium-throughput instrument platforms.
In May 2008, we launched our APTIMA HPV assay in Europe. The
APTIMA HPV assay has been CE-marked for use on the TIGRIS system
and our semi-automated Direct Tube Sampling, or DTS, system.
In June 2008, 3M Corporation, or 3M, discontinued our
collaboration to develop rapid, molecular tests for
healthcare-associated infections, or HCAIs, due to technical
incompatibilities between our NAT technologies and 3Ms
proprietary microfluidics instrument platform. Under the terms
of the discontinued agreement, we were responsible for assay
development, which 3M funded. 3M had also agreed to pay us
milestones based on technical and commercial progress. We earned
the first of these milestones, related to assay feasibility, in
the fourth quarter of 2007. Based on the termination of the
agreement, in June 2008 we recorded $2.7 million in
collaborative research revenue that was previously deferred. In
addition, we received $370,000 in wind-down costs in December
2008 as part of the termination of the collaboration. We are
currently exploring other opportunities to commercialize our
prototype assays in the HCAI field.
In January 2009, we extended the term of our blood screening
collaboration with Novartis until June 30, 2025. The
parties also agreed to customize our Panther instrument, a fully
automated molecular testing platform now in development, for use
in the blood screening market. In addition, the parties agreed
to evaluate, using our technologies, the development of
companion diagnostics for current or future Novartis medicines.
For additional information regarding our recently revised blood
screening collaboration with Novartis, see Corporate
Collaborations and Strategic Arrangements Agreement
with Novartis (formerly Chiron Corporation) below.
In January 2009, we made a recommended cash offer to acquire
Tepnel Life Sciences Plc, or Tepnel, a company registered in
England and Wales, for approximately $132.2 million (based
on the exchange rate described in the offer). Our offer is
subject to certain conditions, including approval of the offer
by a majority in number representing 75% or more in value of
Tepnels shareholders entitled to vote with respect to the
proposed transaction. If we are successful in our acquisition of
Tepnel, we believe the acquisition will provide us access to
growth opportunities in transplant diagnostics, genetic testing
and pharmaceutical services, as well as accelerate our ongoing
strategic efforts to strengthen our marketing and sales,
distribution and manufacturing capabilities in the European
molecular diagnostics market.
3
Technology
Nucleic acid testing technology is based on detection of
sequences of nucleic acids, which store and transfer genetic
information in living organisms. The two main types of nucleic
acids are DNA and ribonucleic acid, or RNA. DNA functions as a
stable repository of genetic information, while RNA typically
serves to transfer the information stored within DNA to the
cells machinery for making proteins.
DNA and RNA are both composed of chains of chemical subunits
called nucleotides. There are four types of nucleotides in DNA,
which differ in one chemical part called a base. The four
different bases are: adenine, thymine, guanine and cytosine
(abbreviated A, T, G and C). These four nucleotides form the
building blocks of all DNA. The sequence of the individual A, T,
G and C nucleotides in a DNA molecule encodes the genetic
information that instructs the cell how to make particular
proteins. Because DNA sequences determine which proteins a cell
will make, the differences in a cells DNA sequences make
the cells of one organism differ from the cells of another.
Most DNA in cells exists in the form of a double-stranded
structure that resembles a twisted ladder. In double-stranded
DNA, the nucleotides on opposite sides of the ladder are always
paired in a precise way. An A nucleotide binds only
to a T nucleotide on the opposite strand, and vice
versa. Likewise, a G nucleotide binds only to a
C nucleotide, and vice versa. Each combination of an
A nucleotide with a T nucleotide (or a
C with a G) is referred to as a
base pair. The way in which each type of nucleotide
binds only to one other type of nucleotide is called
complementary base pairing. As a result of
complementary base pairing, the sequence of nucleotides on one
strand of a DNA molecule necessarily determines the sequence of
nucleotides on the opposite strand.
The attraction of a nucleotide sequence to its
complementary sequence enables the use of pieces of nucleic acid
as probes to detect the presence of a target nucleic acid in a
test sample. If two complementary pieces of DNA (or RNA) are
present in a solution under the right conditions, the
complementary bases will come together and bind to form a double
strand. This method is commonly known as nucleic acid
hybridization. Nucleic acid hybridization techniques can
be applied in a diagnostic test to detect an infectious organism
(the target organism) by the use of a suitably labeled short
nucleotide sequence or probe that is designed to bind
specifically to a complementary nucleic acid sequence known to
be unique to the target organism. The sample suspected of
containing the infectious organism is treated to break open the
organism, release its nucleic acids into the solution, and
render them single-stranded, if necessary. The specific probe is
then added, and conditions conducive to hybridization are
established.
If the target organism is present in the sample, the probe
should bind to the target organisms nucleic acids because
the sequence of the probe has been designed to be complementary
to them. By attaching a detectable label to a probe, it is
possible to determine how much, if any, of that probe has bound
to sequences from the target organism.
In order to facilitate detection of the target, it is desirable
in many instances to increase the amount of target nucleic acid
present in a sample by a process known as amplification. The
goal of target amplification technologies such as our patented
Transcription-Mediated Amplification, or TMA, method is to
produce millions of copies of the target nucleic acids, which
can then be detected using DNA or RNA probes.
Current
Market Opportunity
Overview
The NAT market developed in response to a need for more rapid,
sensitive and specific diagnostic tests for the detection of
infectious microorganisms than were previously available using
traditional laboratory procedures, such as culture and
immunoassays. Culture methods require the growth of a
microorganism in a controlled medium and can take several days
or longer to yield a definitive diagnostic result. By contrast,
nucleic acid probes, which specifically bind to nucleic acid
sequences that are known to be unique to the target organisms,
can generally deliver a diagnostic result in just hours. For
example, culture tests for Mycobacterium tuberculosis can
take four to eight weeks for a traditional culture-based
diagnosis, compared to only a few hours for NAT. The greater
sensitivity and increased specificity of NAT relative to
immunoassays allows for the detection of the presence of a lower
concentration of the target organism and helps clinicians
distinguish between harmful and benign microorganisms, even when
the organisms are closely related, reducing the potential for
false negative results and thus the number of
undiagnosed individuals or individuals who are incorrectly
diagnosed as having the disease. For example, the
4
greater sensitivity of amplified NAT allows for the rapid,
direct detection of a target organism like Chlamydia
trachomatis in urine, even when it is present in low
concentrations.
We have focused our business on market opportunities in three
segments of the NAT market, clinical diagnostics, blood
screening and industrial testing. The clinical diagnostic market
has historically accounted for the majority of our NAT sales.
According to Sannes and Associates, Inc., our products
represented approximately 60% of the total chlamydia and
gonorrhea tests sold in the United States in 2008. In blood
screening, we estimate that currently the Procleix HIV-1/HCV
assay and WNV assay are utilized to screen over 80% of the
United States donated blood supply for HIV-1, HCV and WNV.
In order to address the emerging NAT market for industrial
testing, in July 2005, we entered into a collaboration agreement
with GEI to develop, manufacture and commercialize NAT products
designed to detect the unique genetic sequences of
microorganisms for GEIs exclusive use or sale in selected
water testing applications. In August 2005, we entered into a
collaboration agreement with Millipore to develop, manufacture
and commercialize NAT products for rapid microbiological and
viral monitoring for Millipores exclusive use or sale in
process monitoring in the biotechnology and pharmaceutical
manufacturing industries. Finally, in November 2006, we entered
into a collaboration with 3M to develop, manufacture and
commercialize NAT products to enhance food safety. This
agreement with 3M was terminated in December 2007 and we are
seeking other opportunities to commercialize our prototype
assays in the food testing field.
In January 2009, we made a recommended cash offer to acquire
Tepnel for approximately $132.2 million (based on the
exchange rate described in the offer). Our offer is subject to
certain conditions, including approval of the offer by a
majority in number representing 75% or more in value of
Tepnels shareholders entitled to vote with respect to the
proposed transaction. If we are successful in our acquisition of
Tepnel, we believe the acquisition will, among other things,
provide us access to growth opportunities in the transplant
diagnostics and genetic testing markets. Tepnels human
leukocyte antigens, or HLA, testing products are used to match
donors and recipients in anticipation of transplant surgeries,
as well as in the ongoing management of transplant recipients.
Tepnel also sells genetic tests for cystic fibrosis, Down
Syndrome and familial hypercholesterolemia, among others.
5
The diagram below illustrates our understanding of the existing
and emerging worldwide NAT markets, with some examples of our
product targets and those of others within each category.
The
Product Categories in Which We Compete
Clinical Diagnostics for the Detection of Non-Viral
Microorganisms. NAT assays are currently used to
detect the microorganisms causing various STDs, including
chlamydia and gonorrhea, as well as those causing various other
infectious diseases, such as Mycobacterium tuberculosis,
Group A Streptococcus, Group B Streptococcus and
Staphylococcus aureus.
Chlamydia, the common name for the bacterium Chlamydia
trachomatis, causes the most prevalent bacterial sexually
transmitted infection in the United States, with an estimated
2.8 million new cases in the United States each year
according to the Centers for Disease Control, or CDC. The
clinical consequences of undiagnosed and untreated chlamydia
infections include pelvic inflammatory disease, ectopic
pregnancy and infertility. Gonorrhea, the disease caused by the
bacterium Neisseria gonorrhoeae, is the second most
frequently reported bacterial STD in the United States,
according to the CDC. The CDC estimates that each year
approximately 700,000 people in the United States contract
gonorrhea. Untreated gonorrhea is also a major cause of pelvic
inflammatory disease, which may lead to infertility or abnormal
pregnancies. In addition, recent data suggest that gonorrhea
facilitates HIV transmission. Chlamydia and gonorrhea infections
frequently co-exist, complicating the clinical differential
diagnosis. Because chlamydia and gonorrhea infections are often
asymptomatic, screening programs are important in high-risk
populations, such as sexually active men and women between the
ages of 15 and 25.
6
Tuberculosis, or TB, the disease caused by the microorganism
Mycobacterium tuberculosis, remains one of the deadliest
diseases in the world. Group B Streptococcus, or GBS, represents
a major infectious cause of illness and death in newborns in the
United States and can cause epilepsy, cerebral palsy, visual
impairment, permanent brain damage and retardation. Group A
Streptococcus, or GAS, is the cause of strep throat,
which if left untreated may cause serious complications, such as
rheumatic fever and rheumatic heart disease.
Healthcare associated infections, or HCAIs, are a growing
problem worldwide. According to the CDC, in American hospitals
alone, HCAIs account for an estimated 1.7 million
infections and approximately 100,000 deaths annually. Two of the
major causes of HCAIs are Staphylococcus aureus and an
antibiotic resistant strain of Staphylococcus aureus
known as methicillin-resistant Staphylococcus aureus,
or MRSA.
Clinical Diagnostics for the Detection of Viral
Microorganisms. NAT assays can be used to detect
viral DNA or RNA in a patient sample. These tests can be
qualitative, meaning that the tests simply provide a
yes-no answer for the presence or absence of the
virus, or quantitative, meaning that the quantity of virus is
determined in the patient sample.
HIV is the virus responsible for acquired immune deficiency
syndrome, or AIDS. Individuals with AIDS show progressive
deterioration of their immune systems and become increasingly
susceptible to various diseases, including many that rarely pose
a threat to healthy individuals.
HCV is a blood-borne pathogen posing one of the greatest health
threats in developing countries. According to the World Health
Organization, or WHO, approximately 80% of newly infected
patients progress to develop chronic infection, which can lead
to both cirrhosis and liver cancer. The WHO reports that
approximately 170 million people are infected worldwide
with HCV. According to the National Cancer Institute, an
estimated 4.1 million people in the United States have been
infected with HCV, of whom 3.2 million are chronically
infected according to the CDC. Most people with chronic HCV
infection are asymptomatic.
HBV remains a major public health problem worldwide, though new
HBV infections per year in the United States have declined
significantly since the 1980s. Chronic HBV infection can lead to
the development of severe and potentially fatal complications,
such as cirrhosis of the liver.
Clinical Diagnostics for the Detection of Markers for
Cancer. The field of NAT-based cancer diagnostics
is an emerging market as new markers that correlate to the
presence of cancer continue to be discovered. We have developed
diagnostic tests designed to detect markers for prostate cancer.
According to the Prostate Cancer Foundation, prostate cancer is
the most common non-skin cancer in the United States, affecting
an estimated one in six men.
In addition, we have also commenced a U.S. clinical trial
for our investigational APTIMA HPV assay, which is designed to
detect 14 types of high-risk HPV associated with cervical
cancer. According to the National Cancer Institute, cancer of
the cervix affects more than 500,000 women worldwide each year.
Blood Screening. According to the WHO, each
year more than 80 million units of blood are donated
worldwide. Before being used for transfusion, blood must be
screened to ensure that it does not contain infectious agents
such as viruses. The most serious viral threats to recipients of
donated blood include HIV, HCV, WNV and HBV. In the United
States, most blood collection centers perform NAT screening of
donated blood by taking samples from donors of blood and then
combining these samples into pools of 16 samples. These pooled
samples are then tested to determine whether a virus is present.
If the presence of a virus is detected, additional testing is
then conducted to determine which sample in the pool contains
the virus. Some blood collection centers, such as the United
States military, test blood donor samples individually rather
than in pools. In addition, individual donor testing, or IDT,
may be used during epidemic peaks.
Prior to the introduction of NAT for blood screening, blood
collection centers primarily used immunoassays to determine the
presence of blood-borne pathogens through the detection of
virus-specific antibodies and viral antigens. These tests either
directly detect the viral antigens or detect antibodies formed
by the body in response to the virus. However, this response may
take some time. Consequently, if the donor has not developed
detectable antibodies or detectable amounts of viral antigens as
of the time of the donation, recipients of that blood may be
unwittingly exposed to serious disease. In the case of HIV-1,
antibodies are detectable in the blood approximately
7
22 days after infection. With HCV, the window
period between the time of infection and the detection of
the antibodies is much longer, approximately 70 days or
more. NAT technology can narrow both window periods
significantly through amplification and detection of the nucleic
acid material of the viruses themselves rather than requiring
the development of detectable levels of antibodies or viral
antigens. According to the CDC, NAT reduces the window period
for HIV-1 detection from 22 days for tests relying on HIV-1
antibodies to 12 days. We believe that NAT reduces the
window period for HCV detection by approximately 50%, compared
to tests relying on HCV antibodies. We believe that with IDT,
NAT assays may reduce the window period for HBV detection by up
to 42%, compared to HBV antibody tests for detection of HBV
surface antigen. We also believe that the only practical means
of accomplishing IDT for HBV detection will be through the use
of a fully automated instrument, such as our TIGRIS instrument.
Industry
Growth Trends
Adoption of amplified screening technology. We
believe that the market for NAT-based clinical diagnostic
products for the detection of non-viral microorganisms,
particularly STDs, will expand due to the adoption of amplified
screening technology. Amplification is particularly advantageous
when screening for the presence of a microorganism when the
level of that microorganism in clinical samples might be
insufficient to permit detection with other methods. While
potential carriers of STDs may forego diagnosis if faced with
invasive methods of testing, we believe amplified NAT
technology, which can use samples collected non-invasively, such
as urine, will expand screening of high-risk populations and
asymptomatic individuals.
Advances in automated testing. We believe that
use of automated instrumentation, such as our TIGRIS instrument
designed for high-throughput customers and our development-stage
Panther instrument designed for low to mid-volume customers,
will facilitate growth in both the clinical diagnostics and
blood screening segments of the NAT market. Non-automated NAT
testing generally requires highly-skilled laboratory
technologists and we believe it is becoming increasingly
difficult for clinical laboratories to recruit and retain these
employees. We anticipate that demand for automated testing will
increase as the technology is applied to diagnose new target
microorganisms, including HPV. We believe the rate of market
growth for testing additional microorganisms will depend heavily
upon automation, as well as continuing advances in testing
methodologies that address the issues of specificity,
sensitivity, contamination, ease of use, time to results and
overall cost effectiveness.
Increased focus on safety of blood supply. We
believe blood collection centers will continue to focus on
improving the safety of donated blood by adopting the most
advanced blood screening technologies available. In addition, we
believe that certain blood screening markets are trending from
pooled testing of large numbers of donor samples to smaller pool
sizes. We have already observed this trend with respect to
certain sales internationally. In addition, certain blood
collection centers may seek to adopt IDT for some or all
organisms under certain conditions, rather than the testing of
pooled samples, as automated instrumentation technologies make
such testing feasible. During the peak period of the WNV season
in 2007, for example, various blood collection centers used our
technology and WNV assay for IDT.
Demand for improved diagnostic tests for
cancer. New markers that correlate to the
presence of cancer cells continue to be discovered, and we
believe that once these markers have been clinically validated,
there will be a large market for NAT-based cancer diagnostic
products. In November 2006, we launched our CE-marked PROGENSA
PCA3 assay, a prostate-cancer specific molecular diagnostic
test, in the European Economic Area. Analyte specific reagents,
or ASRs, for detection of the PCA3 gene are also available in
the United States. ASRs comprise a category of individual
reagents utilized by clinical laboratories to develop and
validate their own diagnostic tests. We acquired exclusive
worldwide diagnostic rights to the PCA3 gene from DiagnoCure,
Inc., or DiagnoCure, in November 2003. In addition, in May 2006,
we entered into a license agreement with the University of
Michigan for exclusive worldwide rights to develop diagnostic
tests for genetic translocations that have been shown in
preliminary studies to be highly specific for prostate cancer
tissue. In 2007, we received an aggregate of $3.6 million
in awards for the development of improved cancer diagnostic
assays from the U.S. Army Medical Research and Material
Command, which actively manages research programs for the
Department of Defense.
In March 2008, we started U.S. clinical trials for our
investigational APTIMA HPV assay. The investigational APTIMA HPV
assay is an amplified nucleic acid test that is designed to
detect 14 types of high-risk HPV that are
8
associated with cervical cancer. More specifically, the assay is
designed to detect two mRNAs that are made in higher amounts
when HPV infections progress toward cervical cancer. We believe
that targeting these mRNAs may more accurately identify women at
higher risk of having, or developing, cervical cancer than
competing assays that target HPV DNA. In addition, in May 2008,
we launched our APTIMA HPV assay in Europe. The APTIMA HPV assay
has been CE-marked for use on the TIGRIS system and our DTS
system.
Emerging opportunities in industrial testing market for rapid
molecular methods. We believe that significant
new opportunities are emerging for NAT-based products in various
industrial market segments, including quality control testing in
biopharmaceutical and beverage manufacturing processes and
testing for harmful contaminants in the environment and
industrial water. We believe the move to rapid molecular methods
is being driven by economic factors, as well as regulatory
factors such as the FDAs Process Analytical Technology
initiative, to encourage pharmaceutical companies to adopt rapid
methods to test their manufacturing processes for the presence
of objectionable organisms. We believe our collaborations with
GEI and Millipore will facilitate our development of new
products for, and access to, these new markets. Millipore
launched the first such product under our collaboration in
January 2008.
We believe additional emerging non-clinical markets for NAT
include food testing, personal care products manufacturing
processes and bioterrorism detection testing. Today, these
markets predominately use traditional methods for
microbiological testing, such as culture. However, we believe
NAT testing has the potential to provide more rapid and
efficient tests in these markets. Here again, we believe
regulatory factors will play a role in shifting to molecular
testing methods. In November 2007, for example, the FDA released
a Food Protection Plan that advocates the validation and
implementation of real-time diagnostic methods that allow for
rapid,
on-site
analysis of food samples. We are currently seeking opportunities
to commercialize our prototype assays in the food testing field
that were developed under our collaboration with 3M, which
terminated in December 2007.
Development of other emerging markets for NAT
technology. We believe markets will continue to
develop for new applications of NAT technology in other clinical
and non-clinical fields. Among clinical fields, we believe NAT
technology will be utilized in new applications such as genetic
predisposition testing and pharmacogenomics, which involves the
study of the relationship between nucleic acid sequence
variations in an individuals genome and the
individuals response to a particular drug.
We expect that nucleic acid assays will be used in the field of
pharmacogenomics to screen patients prior to administering new
drugs. Many genetic variations are caused by a single mutation
in nucleic acid sequence, a so-called single nucleotide
polymorphism, or SNP. Individuals with a specific SNP in a
drug metabolism gene may not respond to a drug or may have an
adverse reaction to that drug because the body may not
metabolize the drug in a normal fashion. We believe the
emergence of pharmacogenomics and individually targeted
therapeutics will create opportunities for diagnostic companies
to develop tests to detect genetic variations that affect
responses to drug therapies.
Genetic testing to identify individuals at risk of certain
diseases and pathological syndromes is emerging as an additional
market for NAT technology. Nucleic-acid based testing for SNPs
and other genetic anomalies can be used to determine an
individuals predisposition to such conditions as
thrombosis or bloodclotting. Our license of
bioMérieuxs intellectual property rights for the
factor V and prothrombin mutation tests could allow us to access
this market.
Improvements in detection technologies. Many
current amplified nucleic acid tests provide an end
point result, requiring that the amplification and
detection processes be completed before a result is obtained.
New technology permits kinetic or real-time
detection of target analytes as amplification proceeds,
permitting conclusions to be drawn before the amplification
process is complete, and thereby reducing the time to result.
Real-time detection methods are also capable of providing both a
qualitative and quantitative result from a single test. Several
companies have introduced initial real-time products. For
example, Abbott Laboratories has been approved to apply the CE
mark to a real-time test for the simultaneous detection of
Chlamydia trachomatis and Neisseria gonorrhoeae,
allowing the test to be marketed in the European Economic Area.
In April 2005, Roche was approved to apply the CE mark to its
real-time COBAS AmpliPrep/COBAS TaqMan tests for HIV-1, HCV, and
HBV. Roche was also approved to apply the CE mark to a real-time
test for Chlamydia trachomatis. We intend to develop
assays for our collaborations with GEI and Millipore using
real-time technology. Millipore launched the first such product
under our collaboration in January 2008. In addition, our
prototype assays in the food testing and HCAI fields developed
under our former collaborations with 3M incorporate real-time
technology.
9
Our
Competitive Strengths
Our competitive strengths form the foundation for our business
and we believe position us to compete effectively within the NAT
market.
Proprietary
Core Technologies
We believe that we have developed one of the broadest portfolios
of NAT technologies in the industry. Our products incorporate
these technologies, which, in combination, have significantly
advanced our NAT assays, and we believe can make them more
specific, more sensitive, easier to use and faster to result
than products based on competing NAT technologies. For example,
our proprietary TMA technology offers some significant
advantages over other available amplification methods, including
Polymerase Chain Reaction, or PCR. We believe TMA technology
allows our products to offer a higher degree of sensitivity,
less risk of contamination and greater ease of use than our
competitors amplified products. We believe our target
capture technology, which is used to extract either molecules
with specific target sequences or all genetic material from a
complex clinical specimen, can remove inhibitory substances that
interfere with amplification, can be easily automated, and can
be performed quickly. In the past, we have leveraged our core
technologies to develop products that have achieved leading
positions in new NAT markets, such as blood screening and STD
testing. We plan to continue to use our core NAT technologies,
and technologies that we may acquire, as a platform for the
development of additional products addressing opportunities in
existing and emerging segments of the NAT market.
Extensive
Range of FDA-Approved Products and Intellectual Property
Portfolio
We believe that we are unique in offering our customers a broad
range of both
non-amplified
and amplified NAT assays, as well as multiple instruments on
which to perform these assays. Our expertise in NAT products has
enabled us to develop FDA-approved products for the detection of
microorganisms causing infectious diseases. In February 2002, we
received FDA approval for the Procleix HIV-1/HCV assay. In
December 2005, the FDA approved our WNV assay for use on eSAS to
screen donated human blood for WNV, and in March 2007 we
received approval of our WNV assay for use on the TIGRIS
instrument. In October 2006 and May 2007, the FDA granted
marketing approval for use of the Procleix Ultrio assay on eSAS
and TIGRIS, respectively, to screen donated blood, plasma,
organs and tissue for HIV-1 and HCV in individual blood
donations or in pools of up to 16 blood samples. In August 2008,
the FDA approved the Procleix Ultrio assay to also screen
donated blood, plasma, organs and tissues for HBV in individual
blood donations or in pools of up to 16 blood samples on eSAS
and on the TIGRIS system. Our FDA-approved NAT assays are
currently performed on our proprietary luminometers and DTS and
TIGRIS (in the case of our APTIMA Combo 2 and WNV assay)
instruments. As of December 31, 2008, we had more than 470
United States and foreign patents covering our products and
technologies, and we proactively pursue an aggressive patent
strategy designed to protect both existing products and new
innovations.
Innovative
Product Research and Development
As of December 31, 2008, our research and development group
consisted of 227 full-time employees, 97 of whom hold
advanced degrees. From our PACE family of products to our
amplified APTIMA Combo 2 assay, which are sufficiently sensitive
to be able to detect both chlamydia infections and gonorrhea in
urine samples from symptomatic or asymptomatic patients, the
Procleix Ultrio assay that detects HIV-1, HCV and HBV in donated
blood, and our CE-marked APTIMA HPV assay that is designed to
detect 14 types of high-risk HPV that are associated with
cervical cancer, our scientists have developed proprietary
assays that have brought significant innovation to the market
for clinical diagnostics and blood screening. To complement
these products, we have developed and continue to develop
automated instrumentation technologies that enable our customers
to increase throughput while improving accuracy in a
cost-effective manner. We have developed, and launched in 2004,
what we believe to be the worlds first fully automated,
integrated, high-throughput, NAT instrument system, known as the
TIGRIS instrument. We are currently developing a new automated
instrument platform, called the Panther instrument system,
designed for low to mid-volume customers. In addition, under our
license agreement with Qualigen, Inc., or Qualigen, we have
conducted feasibility research and development for a closed unit
dose assay, or CUDA, instrument and an associated reagent pouch,
which we believe may offer potential advantages in industrial
testing and other applications. We were awarded a 2004 National
Medal of Technology, the nations highest honor
10
for technological innovation, in recognition of our pioneering
work in developing NAT tests to safeguard the nations
blood supply.
Brand
Recognition
We believe that we benefit from significant brand name
recognition and customer loyalty among laboratories, blood
collection agencies and physicians in the market for NAT assays.
We believe our history of technological innovation, quality
manufacturing, comprehensive sales capabilities and commitment
to customer support has resulted in customer satisfaction and
retention. We estimate that greater than 95% of our STD product
sales during 2008 were to repeat customers. We believe that our
brand name also facilitates market acceptance of our new
products, providing us with opportunities for growth. Based on
information we receive from Novartis, we believe that since 1998
the Gen-Probe/Novartis collaboration has been the sole supplier
of NAT assays for blood screening to the American Red Cross,
which we believe exemplifies our standing in the industry.
Sales
and Technical Support Capabilities
As of December 31, 2008, our direct sales force consisted
of 39 employees and a 47 member technical field support
group. Our direct sales force targets the United States, Canada
and certain countries in Europe. We believe that these
individuals comprise one of the most knowledgeable and effective
sales and support organizations in the molecular diagnostics
industry. Our sales representatives have an average of
approximately 17 years of overall sales experience, with an
average of approximately 11 years focused on sales of NAT
products. We view our long-standing relationships with
laboratory customers and the value-added services that our sales
force and technical field specialist group offer, including
technical product assistance, customer support and new product
training, as central to our success in the United States
clinical diagnostics market. We complement our sales force with
leading international distributors and the direct sales
organizations of our collaborative partners.
Regulatory
and Quality Assurance Experience
Our products, design control and manufacturing processes are
regulated by numerous third parties, including the FDA, foreign
governments, independent standards auditors and customers. Our
team of 139 regulatory, clinical and quality assurance
professionals has successfully led us through multiple quality
and compliance inspections and audits. We began production in
our blood screening product manufacturing facility in 1999. This
facility meets the strict standards set by the FDAs Center
for Biologics Evaluation and Research, or CBER, for the
production of blood screening products. In addition, we have
obtained EN 13485 certification from TÜV Rheinland of North
America, a leader in independent testing and assessment
services. In addition, our regulatory and quality assurance
departments have coordinated audits by Lloyds Register Quality
Assurance leading to EN ISO 13485, EN ISO 9001, EN ISO 14001 and
OHSAS 18001 certifications for our wholly owned U.K. subsidiary,
Molecular Light Technology Research Limited. We believe our
expertise in regulatory and quality assurance and our
manufacturing facilities enable us to efficiently and
effectively design, manufacture and secure approval for new
products and technologies that meet the standards set by
governing bodies and our customers.
Our
Growth Strategy
We have successfully created and maintained a leadership
position in a number of segments of the NAT testing market. From
this strong position, we plan to grow our business through the
following strategies:
Establish
Leadership Positions in New Markets by Leveraging Our Core
Technologies
We have had a successful track record in identifying new product
and market opportunities and becoming the market leader in a
number of NAT testing segments by providing innovative product
solutions based on our proprietary technology base. In the past,
we have utilized our patented technology portfolio, innovation
and market development expertise to establish leadership
positions in areas such as chlamydia and gonorrhea testing. Our
ability to strategically identify and assume leadership roles in
new markets was evidenced by our entrance into the blood
screening market. We successfully developed the first
FDA-approved NAT assay for HIV-1/HCV detection, the Procleix
HIV-1/HCV assay, which we estimate is currently being used to
screen more than 80% of the United States blood supply.
11
We are exploring opportunities to develop new products for
emerging NAT markets. We acquired exclusive worldwide diagnostic
rights to the PCA3 gene from DiagnoCure in November 2003. In
addition, in May 2006, we entered into a license agreement with
the University of Michigan for exclusive worldwide rights to
develop diagnostic tests for genetic translocations that have
been shown in preliminary studies to be highly specific for
prostate cancer tissue. In November 2006, we CE marked our
PROGENSA PCA3 assay, a prostate-cancer specific molecular
diagnostic test, allowing it to be marketed in the European
Economic Area. Our ASRs for detection of the PCA3 gene are also
available in the United States.
We also have two collaborations in the industrial testing
market. We believe our collaborations with GEI and Millipore,
pursuant to which each will manage worldwide commercialization
of any products resulting from the respective collaboration,
will enable us to access large customer bases in the markets for
industrial-water and biopharmaceutical process testing,
respectively. In January 2008, Millipore commenced
commercialization of the first MilliPROBE assay under our
collaboration, which targets the bacterium Pseudomonas
aeruginosa and is designed as an in-process, early warning
system to provide faster, more effective detection of
Pseudomonas aeruginosa in purified water used during drug
production.
In November 2007 and June 2008, 3M discontinued our
collaborations for the development and commercialization of NAT
products to enhance food safety and for HCAIs, respectively.
Prior to the termination of these collaborations, we achieved
certain technical milestones with our prototype assays,
entitling us to payments from 3M of $2.0 million relating
to our prototype assays to enhance food safety and
$2.7 million relating to our prototype HCAI assays. We are
currently exploring other opportunities to commercialize our
prototype assays in these fields.
Deliver
Proprietary Automated and Fully Integrated Systems for NAT
Assays
We intend to continue to develop instruments that complement our
existing and anticipated product lines for use in clinical
diagnostics, blood screening and industrial testing. The TIGRIS
instrument is designed to significantly reduce the time, labor
costs, risk of contamination and complexity associated with
performing NAT assays. The automation and increased throughput
of the TIGRIS instrument enables blood collection centers to
process the large testing volumes necessary to screen each
individual unit of donated blood for the presence of
life-threatening viruses. In addition to the TIGRIS instrument,
we are currently developing our Panther instrument system, a new
automated instrument platform designed for low to mid-volume
customers. We believe this approach of providing our customers
with the latest generation of systems solutions will allow us to
reinforce our market position and brand recognition and to
penetrate new markets.
Expand
Our Clinical Diagnostics and Blood Screening Businesses with New
Products
We intend to continue to broaden our product offerings through
the introduction of new products to serve the clinical
diagnostics and blood screening markets. With an aim to expand
our offerings in the clinical diagnostics field, we started
U.S. clinical trials for our investigational APTIMA HPV
assay in March 2008. The investigational APTIMA HPV assay is an
amplified nucleic acid test that is designed to detect 14 types
of high-risk HPV that are associated with cervical cancer and is
designed to run on our TIGRIS instrument system and on our
future medium-throughput instrument platforms. In May 2008, we
launched our APTIMA HPV assay in Europe, which has been
CE-marked for use on the TIGRIS system and our DTS system.
We use a systems approach to product development, which involves
combining elements of our core proprietary technologies to
create products that best meet our customers needs. For
example, the Procleix Ultrio assay, which we developed in
collaboration with Novartis, adds an assay for HBV to the
previously approved Procleix HIV-1/HCV assay and is designed to
detect the presence of all known HIV-1 groups and subtypes and
HCV and HBV genotypes in human plasma during the very early
stages of infection, when those agents are present but cannot be
detected by immunoassays. The Procleix Ultrio assay uses our
target capture, TMA and Dual Kinetic Assay, or DKA, technologies.
By understanding how our technologies complement one another and
by combining reagents in our new products, we expect to
capitalize on the substantial product development work that we
invested in existing products. We believe that this approach and
our experience in bringing FDA-cleared products to market will
reduce
12
development cycle times for new products, which, in turn, will
help us expand our menu of clinical diagnostic and blood
screening products.
Pursue
Future Licensing and Acquisition Opportunities
We continually evaluate technology and other acquisition
opportunities, and have historically supplemented our internal
research and development efforts by obtaining licenses to new
technologies. To maintain our leadership position in NAT
testing, we intend to selectively obtain rights to complementary
technologies through licenses and pursue corporate acquisitions.
For us to enter emerging NAT markets such as cancer testing,
genetics, pharmacogenomics and industrial testing, we may need
to obtain rights both to new technologies and to disease markers
that are discovered and clinically validated by third parties.
For example, in 2003, we signed a license and collaboration
agreement with DiagnoCure to develop an innovative urine test to
detect the PCA3 gene marker for prostate cancer. In May 2006, we
entered into a license agreement with the University of Michigan
for exclusive worldwide rights to develop diagnostic tests for
genetic translocations that have been shown in preliminary
studies to be highly specific for prostate cancer tissue.
In June 2008, following a bid by Solvay Pharmaceuticals, we
launched a conditional counterbid to acquire Innogenetics NV, a
Belgian molecular diagnostics company. We subsequently withdrew
our counterbid to acquire Innogenetics in July 2008, following
the submission by Solvay Pharmaceuticals of a higher bid.
In January 2009, we made a recommended cash offer to acquire
Tepnel for approximately $132.2 million (based on the
exchange rate described in the offer). Our offer is subject to
certain conditions, including approval of the offer by a
majority in number representing 75% or more in value of
Tepnels shareholders entitled to vote with respect to the
proposed transaction. If we are successful in our acquisition of
Tepnel, we believe the acquisition will provide us access to
growth opportunities in transplant diagnostics, genetic testing
and pharmaceutical services, as well as accelerate our ongoing
strategic efforts to strengthen our marketing and sales,
distribution and manufacturing capabilities in the European
molecular diagnostics market.
Pursue
Collaborative Relationships to Accelerate New Product
Development and Enhance Our Global Marketing
Capabilities
We will pursue collaborative relationships that enable us to
implement our strategies, particularly with respect to the
development of new products and entry into new markets. We seek
to partner with industry leaders who can offer access to
intellectual property or who can complement our
commercialization capabilities by distributing co-developed
products through their sales organizations. For example, our
collaboration with Novartis for the blood screening market has
allowed us to combine our NAT technology with Novartis
patent portfolio relating to HIV and HCV and to leverage
Novartis distribution and sales resources. Further, we
believe our collaborations with GEI and Millipore, pursuant to
which each will manage worldwide commercialization of any
products resulting from the respective collaboration, will
enable us to access large customer bases in the markets for
industrial-water and biopharmaceutical processes testing,
respectively. In addition, we are currently exploring other
opportunities to commercialize our HCAI and food testing
prototype assays that were developed under our former
collaborations with 3M.
Our
Proprietary NAT Technologies
We have developed technologies that make NAT assays practical
and effective for commercial use, thereby overcoming many of the
limitations of previous DNA probe assays that restricted their
use to research laboratories. Our products incorporate a
combination of patented technologies that have significantly
advanced NAT assays, and can make them more specific, more
sensitive, easier to use and faster to result than products
based on competing technologies. These technologies include the
following:
|
|
|
|
|
targeting of ribosomal RNA, or rRNA;
|
|
|
|
target capture/nucleic acid extraction technology;
|
|
|
|
Transcription-Mediated Amplification technology, or TMA;
|
13
|
|
|
|
|
chemiluminescent detection using Hybridization Protection Assay
and DKA technologies;
|
|
|
|
fluorescent real-time detection technology; and
|
|
|
|
APTIMA technology.
|
Together, these technologies have allowed us to commercialize
new diagnostic tools that provide results in hours instead of
days or weeks. This has led to quicker time to result and
diagnosis, thereby making a difference in patient treatment and
outcome.
Targeting Ribosomal RNA. We have developed and
patented a technique that detects and identifies organisms by
targeting their rRNA. The major benefits in targeting rRNA
include the following:
|
|
|
|
|
Each bacterial cell contains up to 10,000 copies of rRNA, as
compared with only a few copies of DNA. Most of our
competitors NAT assays target DNA, which is present in
only one or two copies in each target organism cell. Therefore,
by using a probe that hybridizes to rRNA, the sensitivity of the
test is increased thousands of times. This has allowed us to
develop indirect and direct probe tests that are used with
cultured samples or samples drawn directly from the patient;
|
|
|
|
The high number of rRNA targets also offers significant
advantages when
target-amplified
assays are used. When very small numbers of organisms are
present in a sample, they may not be present in the portion of
the sample used for the assay, despite being present in the
sample. This would result in a negative test result. By breaking
open the organism prior to sampling, the multiple copies of rRNA
targets are dispersed throughout the sample volume and the
likelihood of detecting them is increased many fold. Thus, the
likelihood of obtaining a false negative result is significantly
less than is the case when DNA is targeted;
|
|
|
|
rRNA molecules naturally exist as single strands that can
directly hybridize with our chemiluminescent; and labeled DNA
probes. This is in contrast to most DNA targets, which exist as
double strands that must be separated before a probe can bind.
These separated DNA strands tend to hybridize to each other
rather than to the DNA probe, thus limiting the amount of DNA
probe that can bind and the overall sensitivity of the test; and
|
|
|
|
rRNA molecules unique to the organism are present in all
bacteria, fungi and parasites. This gives us the ability to
design diagnostic products for emerging infectious diseases
caused by these pathogens.
|
Target Capture/Nucleic Acid Extraction
Technology. Detection of target organisms that
are present in small numbers in a large-volume clinical sample
requires that target organisms be concentrated to a detectable
level. One way to accomplish this is to isolate the particular
nucleic acid of interest by binding it to a solid support, which
allows the support, with the target bound to it, to be separated
from the original sample. We refer to such techniques as
target capture.
We have developed target capture techniques to immobilize
nucleic acids on magnetic beads by the use of a capture
probe that attaches to the bead and to the target nucleic
acid. We use a magnetic separation device to concentrate the
target by drawing the magnetic beads to the sides of the sample
tube, while the remainder of the sample is washed away and
removed. When used in conjunction with our patented
amplification methods, target capture techniques concentrate the
nucleic acid target(s) and also remove materials in the sample
that might otherwise interfere with amplification.
Target capture offers the following benefits:
|
|
|
|
|
concentration of nucleic acid target(s) from large volume
samples, without the need for centrifugation steps;
|
|
|
|
elimination of potential inhibitors of amplification;
|
|
|
|
increased ability to test a variety of clinical samples,
including urine and blood;
|
|
|
|
capture of multiple targets by using capture probes that
hybridize to one or more specific nucleic acid
sequences; and
|
|
|
|
enhanced specificity through selective capture of target and
removal of contaminants that may produce a false positive signal.
|
14
Transcription-Mediated Amplification. The goal
of amplification technologies is to produce millions of copies
of the target nucleic acid sequences that are present in samples
in small numbers, which can then be detected using DNA probes.
Amplification technologies can yield results in only a few hours
versus the several days or weeks required for traditional
culture methods.
Many amplification-based NAT assays used routinely in clinical
laboratories utilize a technology known as PCR to amplify DNA.
With additional steps, PCR also can be used to amplify RNA.
Since most organisms contain only one or two copies of DNA,
there are fewer target molecules to initiate amplification when
DNA targets are used, and sometimes amplification does not begin
at all. In such cases, assays using PCR can fail to produce
results. PCR also uses repeated heating and cooling steps,
requiring complex and expensive thermocyclers. Because PCR
produces large amounts of DNA, which, unlike RNA, is a stable
molecule, there is an increased risk of cross-contamination from
one PCR assay to another, potentially leading to a high number
of false positive results.
Our patented TMA technology is designed to overcome problems
faced by other target amplification methods such as PCR. TMA is
a transcription-based amplification system that uses two
different enzymes to drive the process. The first enzyme is a
reverse transcriptase that creates a double-stranded DNA copy
from an RNA or DNA template. The second enzyme, an RNA
polymerase, makes thousands of copies of the complementary RNA
sequence, known as the RNA amplicon, from the
double-stranded DNA template. Each RNA amplicon serves as a new
target for the reverse transcriptase and the process repeats
automatically, resulting in an exponential amplification of the
original target that can produce over a billion copies of
amplicon in less than 30 minutes.
TMA offers the following benefits:
|
|
|
|
|
The TMA process takes place in one tube at one temperature
without the need of thermocyclers required by PCR. All reagents
are added to the tube and nothing is removed. This makes the
test simpler to use and suitable for automation, and it
minimizes the possibility of carry-over contamination and false
positive test results;
|
|
|
|
The RNA nucleic acid that is synthesized in the TMA reaction, or
amplicon, is much more unstable when outside the reaction tube
than the DNA that is produced in the PCR method. This
instability of the TMA amplicon in the general laboratory
environment reduces the possibility of carry-over contamination;
|
|
|
|
TMA is able to amplify RNA and DNA targets, whereas PCR requires
additional reagents and steps to amplify RNA; and
|
|
|
|
TMA can be used in end-point chemiluminescent assays as well as
real-time qualitative and quantitative fluorescent
assays.
|
Chemiluminescent Technologies and Hybridization Protection
Assay. Most of our current DNA probe products use
chemiluminescent acridinium ester, or AE molecules, to generate
light as a label for detection. When AE-labeled DNA probes are
mixed with chemical activators, a light signal is produced.
Various competitors DNA probe assays and immunoassays use
enzyme or radioisotope labels. Assays that use enzyme-labeled
DNA probes are complex and can be inhibited by contaminants
present in the sample. Radioisotopes offer a strong signal but
are difficult to handle, difficult to dispose of and dangerous
because they give off harmful radiation.
We have simplified testing, further increased test sensitivity
and specificity, and increased convenience with our patented
Hybridization Protection Assay, or HPA, technology. With HPA, we
introduced the first NAT assay that did not require the
cumbersome wash steps needed with conventional probe tests and
immunoassays. In the HPA process, the AE molecule is protected
within the double-stranded helix that is formed when the probe
binds to its specific target. Prior to activating the AE
molecule, known as lighting off, a chemical is added
that destroys the AE molecule on any unhybridized probes,
leaving the label on the hybridized probes largely unaffected.
When the light off reagent is added to the specimen,
only the label attached to the hybridized probe is left to
produce a signal indicating the target organisms DNA or
RNA is present. All of these steps occur in a single container
and without any wash steps.
Our DKA technology uses two types of AE molecules
one that flashes and another one that
glows. By using DKA, we have created NAT assays that
can detect two separate targets simultaneously.
15
Fluorescent Real-Time Detection Technology. In
addition to HPA chemiluminescent detection assays, we have
developed a series of real-time fluorescent assay systems. These
assays couple TMA, or versions of TMA, with fluorescent probe
detection that gives reduced times of appearance of fluorescent
outputs with increasing amounts of input amplified target
nucleic acid. In these assay formats, amplification and
detection take place simultaneously. As a result, the total time
necessary to obtain a result can be reduced significantly. We
have several types of probes for these assays, including probes
that we have patented and probes that we have licensed from
third parties.
APTIMA Technology. We have combined target
capture, TMA and HPA together into an integrated family of
technologies known as APTIMA. APTIMA assays are highly refined
amplification assays, simplifying sample handling, minimizing
contamination and allowing for the simultaneous detection of two
analytes in one tube. APTIMA assays offer clinical laboratories
the significant advantage of carrying out all steps of the assay
in a single tube. We believe APTIMA thereby increases assay
performance, reduces laboratory costs and improves laboratory
efficiency. APTIMA technology combined with automation such as
the TIGRIS instrument supports true walk-away automation,
allowing hundreds of specimens to be tested by an individual
technician in a single run.
Our
Products
We have applied our core technologies to develop multiple
product lines, all of which utilize our expertise in NAT probes,
sample collection and processing. We currently categorize our
products into clinical diagnostic products and blood screening
products. In January 2008, Millipore launched our first product
in the industrial market.
Clinical
Diagnostic Products
Within our clinical diagnostic product group, we have developed
products for the detection of non-viral and viral microorganisms
and for the detection of markers for cancer.
Clinical
Diagnostic Products for the Detection of Non-Viral
Microorganisms
We have developed FDA-approved amplified and
non-amplified
NAT assays that detect non-viral micro-organisms primarily for
use in clinical diagnostics. We have established a
market-leading position in
non-amplified
NAT assays, particularly with respect to assays for the
detection of chlamydia and gonorrhea, and we have obtained FDA
approvals for amplified STD tests to compete in that market
segment. Our principal products for the detection of non-viral
microorganisms include our
non-amplified
AccuProbe and PACE family of products and our amplified
Mycobacterium Tuberculosis Direct Test and amplified APTIMA
products, as set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FDA
|
|
|
Commercial
|
Product Line
|
|
|
Principal Technologies
|
|
|
Target Microorganism
|
|
|
Clearance/Approval
|
|
|
Distribution
|
AccuProbe Culture Identification
|
|
|
Non-amplified detection of organisms from culture isolates by
using rRNA as the target and Hybridization Protection Assay
|
|
|
Blastomyces dermatitidis Campylobacter
Coccidioides immitis
Enterococcus
Histoplasma capsulatum
Haemophilus influenzae
Group B Streptococcus
Group A Streptococcus
Mycobacterium avium
Complex
Mycobacterium avium Mycobacterium gordonae Mycobacterium
intracellulare Mycobacterium kansasii Mycobacterium tuberculosis
Neisseria gonorrhoeae Streptococcus pneumoniae Staphylococcus
aureus
Listeria monocytogenes
|
|
|
September 1990
November 1989
October 1990
November 1989
February 1990
March 1990
November 1989
November 1990
May 1990
August 1990
April 1990
August 1990
November 1990
April 1990
November 1989
August 1990
August 1990
June 1990
|
|
|
Gen-Probe
North America
bioMérieux,
Rebio Gen
and other distributors
Rest of World
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FDA
|
|
|
Commercial
|
Product Line
|
|
|
Principal Technologies
|
|
|
Target Microorganism
|
|
|
Clearance/Approval
|
|
|
Distribution
|
GASDirect
|
|
|
Non-amplified detection of rRNA from a swab sample by
Hybridization Protection Assay
|
|
|
Group A Streptococcus
|
|
|
March 1994
|
|
|
Gen-Probe
North America
bioMérieux,
Rebio Gen
and other distributors
Rest of World
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PACE
Product Family
|
|
|
Non-amplified detection of rRNA from patient sample by
Hybridization Protection Assay
|
|
|
Chlamydia trachomatis and Neisseria gonorrhoeae,
including combined detection
|
|
|
PACE
December 1987
PACE 2 April 1992 PACE 2C
October 1994
|
|
|
Gen-Probe
North America
bioMérieux,
Rebio Gen
and other
distributors
Rest of World
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mycobacterium Tuberculosis Direct Test (or MTD)
|
|
|
Transcription-Mediated Amplification of rRNA in patient sample
and detection by Hybridization Protection Assay
|
|
|
Mycobacterium tuberculosis
|
|
|
December 1995
|
|
|
Gen-Probe
North America
bioMérieux,
Rebio Gen
and other
distributors
Rest of World
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APTIMA
Combo 2
|
|
|
Target Capture, Transcription-Mediated Amplification of rRNA and
detection by Dual Kinetic Assay
|
|
|
Chlamydia trachomatis and Neisseria gonorrhoeae
|
|
|
May 2001
|
|
|
Gen-Probe
North America
Europe
Rebio Gen
Japan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APTIMA CT
APTIMA GC
|
|
|
Target Capture, Transcription-Mediated Amplification of rRNA and
detection by Dual Kinetic Assay
|
|
|
Chlamydia trachomatis and Neisseria gonorrhoeae
|
|
|
December 2004
March 2005
|
|
|
Gen-Probe
North America
Europe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APTIMA Trichomonas ASR
|
|
|
Target Capture, Transcription-Mediated Amplification of rRNA
|
|
|
Trichomonas vaginalis
|
|
|
Not required
|
|
|
Gen-Probe U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AccuProbe Products. Our AccuProbe Culture
Identification products are powerful tools for the
identification of mycobacterial, fungal and bacterial pathogens,
with sensitivities and specificities approaching 100% in most
cases. These products allow for the detection of target
organisms from primary cultures, eliminating the additional
labor of purifying secondary cultures. All AccuProbe Culture
Identification assays are based on our HPA technology. All of
our AccuProbe Culture Identification tests follow a standard
format, use common reagents and do not require highly trained
technical personnel. Results are obtained utilizing our
luminometers, which are easy to use and offer precise readings.
In addition, the convenient packaging provides extended
stability and shelf life. As part of our AccuProbe Culture
Identification product line, we have also developed a procedure
to detect GBS from broth culture. The assay demonstrates near
100% sensitivity and specificity when testing broth samples
after 24 hours of incubation. Our products address the
market need for a more rapid, direct test procedure for GBS that
can be used to effectively screen women during pregnancy and to
provide prompt results when testing is performed just before
delivery.
Group A Streptococcus Direct. The Group A
Streptococcus Direct Test, or GASDirect assay, is a rapid NAT
assay for the direct detection of Streptococcus pyogenes
in one hour from a throat swab. Sensitivity and specificity
are equivalent to culture methods taking 72 hours to
complete and are higher than the rapid membrane antigen tests
often used in physician offices. The test provides fast and
accurate results, eliminates subjective interpretation by the
laboratory technician, and aids physicians in making more
informed treatment decisions. The products ease of
17
use enables efficient batch testing. An automatic pipetting
option offers greater workflow economies and laboratory
productivity.
PACE Product Family. Our PACE 2C was the first
advanced NAT product to offer the convenience of testing for
both chlamydia infections and gonorrhea from a single patient
specimen. This feature eliminates the need to collect separate
specimens and the need to transport the specimens under
different conditions. The PACE 2C continues to meet the needs of
clinical laboratories that prefer a cost-effective,
non-amplified
NAT assay for routine screening for chlamydia infections and
gonorrhea. Other products in the PACE 2 product line include
individual tests to separately detect and confirm both chlamydia
infections and gonorrhea. The PACE product family also includes
the PACE Specimen Collection kits for endocervical and urethral
swab specimens. Sales of our PACE family of assays have declined
in recent years as we are actively working to convert our PACE
2C customers to our amplified APTIMA Combo 2 product line which,
while partially decreasing PACE family revenues, ultimately
contributes to total clinical diagnostic product sales growth.
Mycobacterium Tuberculosis Direct
Test. Amplification is particularly important
when detecting pathogens present at low levels, as is often the
case with tuberculosis. Culture tests for TB can take four to
eight weeks for a preliminary result. Our amplified
Mycobacterium Tuberculosis Direct, or MTD, test has sensitivity
similar to a culture test but can detect the TB pathogen within
a few hours. The test is performed directly on a patient sample,
and can be used to quickly differentiate between TB and other
mycobacteria, resulting in reduced isolation time and treatment
of an infected patient. Our MTD test was the first amplified NAT
assay for obtaining same day results from sputum samples.
APTIMA Combo 2. To meet market demand for
amplified STD assays, we developed our APTIMA Combo 2 assay,
which received FDA clearance in May 2001 and was launched
commercially in August 2001. Acceptance of first generation
amplified tests was adversely affected by the complexity of the
methodology and the lack of a format suitable for use in the
average laboratory. APTIMA Combo 2, which uses second generation
amplification technologies, allows us to overcome these
barriers. The test offers superior performance and ease of use,
including the use of a penetrable cap that eliminates the need
to uncap samples prior to testing and a sample transport medium
that preserves the integrity of the sample for several weeks at
room temperature.
We believe the assay is ideally suited to test specimens from
both symptomatic and asymptomatic individuals. Symptomatic
individuals typically have large amounts of the microorganism
present at the infection site, while patients who are
asymptomatic typically have much lower levels of the
microorganism present at the infection site.
In addition to amplification technology, our APTIMA Combo 2
assay utilizes our target capture HPA and DKA technologies.
APTIMA Combo 2 will qualitatively detect and differentiate rRNA
from Chlamydia trachomatis and Neisseria gonorrhoeae
bacteria. This continues the one test, two
results advantage we first provided with our PACE 2C
non-amplified
assay for chlamydia infections and gonorrhea. We believe we are
in a unique position to provide both amplified and
non-amplified
NAT assays for these infections. This allows us to compete
effectively in the STD testing market and to provide the
appropriate NAT solution to meet the needs of many different
customers.
Our APTIMA Combo 2 assay is the first clinical diagnostic assay
approved for use on the fully automated TIGRIS instrument. Our
APTIMA Combo 2 assay is also performed on our semi-automated DTS
instruments. In January 2004, we received FDA clearance to use
the APTIMA Combo 2 assay with the APTIMA Vaginal Swab Specimen
Collection Kit, the first kit that enables patients to
self-collect vaginal swab specimens.
In August 2005, the FDA granted marketing clearance to use the
APTIMA Combo 2 assay to test for Chlamydia trachomatis
and Neisseria gonorrhoeae from liquid Pap specimens
collected and processed with Cytyc Corporations
ThinPrep®
2000 system. This new use provides physicians the convenience of
intercepting chlamydia and gonorrhea from the same sample
collected for the
ThinPrep®
Pap Test. The Pap test remains the most widely used screening
test in the United States for the early detection of cervical
cancer. Approximately 50 million Pap tests are performed
annually in the United States, approximately 90% of which are
from liquid PAP specimens.
Other APTIMA Products APTIMA CT, APTIMA GC and
APTIMA Trichomonas ASR. To provide our customers
with greater flexibility for their STD testing needs, we also
have developed individual APTIMA assays to separately detect the
presence of Chlamydia trachomatis and Neisseria
gonorrhoeae, which received FDA approval in December 2004
and March 2005, respectively. In October 2006, the FDA granted
marketing clearance to run our
18
stand-alone APTIMA assays for Chlamydia trachomatis and
Neisseria gonorrhoeae on the TIGRIS instrument. We have
also developed ASRs to detect the parasite Trichomonas
vaginalis. Trichomoniasis is one of the most common sexually
transmitted diseases in the United States that mainly affects
sexually active women. It is estimated by the CDC that
7.4 million new cases occur annually in the United States.
Clinical
Diagnostic Products for the Detection of Viral
Microorganisms
We produce qualitative diagnostic tests that can determine
whether the virus is present, and quantitative tests that can
determine the amount of the virus. These viral diagnostic assays
include a qualitative HCV test, a qualitative HIV-1 RNA assay
and an ASR for quantitative HCV testing, as set forth below, and
currently are run on our semi-automated instruments
incorporating components of our DTS instrument.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target
|
|
|
FDA
|
|
|
Commercial
|
Product Line
|
|
|
Principal Technologies
|
|
|
Microorganism
|
|
|
Clearance/Approval
|
|
|
Distribution
|
Qualitative HCV Assay
|
|
|
Target Capture, Transcription-Mediated Amplification of viral
RNA, detection by Dual Kinetic Assay
|
|
|
HCV
|
|
|
November 2002
October 2006
|
|
|
Siemens
Worldwide
Gen-Probe U.S.
|
Qualitative HIV-1 RNA Assay
|
|
|
Target Capture, Transcription-Mediated Amplification of viral
RNA, detection by Dual Kinetic Assay
|
|
|
HIV-1
|
|
|
October 2006
|
|
|
Gen-Probe
Worldwide
|
ASR for
Quantitative HCV Testing
|
|
|
Target Capture, Transcription-Mediated Amplification of viral
RNA, detection by Hybridization Protection Assay
|
|
|
HCV
|
|
|
Not required
|
|
|
Siemens U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualitative HCV Assay. We developed an
amplified TMA assay for the qualitative detection of HCV based
on the same technology used in our FDA-approved Procleix
HIV-1/HCV assay for screening donated blood. Siemens currently
distributes this assay under the trademark VERSANT in the United
States and international markets under our collaboration
agreement. We commenced distribution of this assay under our own
APTIMA trademark in 2006.
Qualitative HIV-1 RNA Assay. In October 2006,
the FDA approved our APTIMA HIV-1 RNA qualitative assay. The
assay may be used as an aid in the diagnosis of HIV-1 infection,
including acute and primary HIV-1 infection, and to confirm
HIV-1 infection in individuals who repeatedly test positive for
HIV-1 antibodies. The assay is the first FDA-approved
qualitative nucleic acid test for these intended uses. We
commenced distribution of this assay in December 2006.
ASR for Quantitative HCV Testing. We have also
developed, through our collaboration with Siemens, ASRs to
quantitatively determine the amount of HCV present in a sample.
These ASRs and general purpose reagents currently are provided
by Siemens to Quest Diagnostics Incorporated, a leading national
diagnostics company.
Clinical
Diagnostic Products for the Detection of Markers for
Cancer
PROGENSA PCA3 Assay and ASRs. In November
2006, we CE-marked our PROGENSA PCA3 assay, allowing it to be
marketed in the European Economic Area. This gene-based test is
designed to detect the over expression of PCA3 mRNA in urine.
Studies have shown that, in greater than 90 percent of
prostate cancer cases, PCA3 is extremely over-expressed (65-fold
on average) in prostate cancer cells compared to normal cells,
indicating that PCA3 may be a useful biomarker for prostate
cancer. DiagnoCure is the exclusive worldwide
19
licensee for all diagnostic and therapeutic applications of the
gene. We acquired exclusive worldwide diagnostic rights to the
PCA3 gene from DiagnoCure in November 2003. We currently plan to
modify our existing PCA3 assay for use with our investigational
Panther instrument system. As of December 31, 2008, five
clinical laboratory customers in the United States had completed
validation of TMA assays for PCA3 and PSA using our ASRs and
general purpose reagents.
APTIMA HPV Assay. We have developed an APTIMA
HPV assay that is designed to detect 14 types of high-risk HPV
associated with cervical cancer. More specifically, the assay is
designed to detect two messenger RNAs that are made in higher
amounts when HPV infections progress toward cervical cancer.
According to the National Cancer Institute, cancer of the cervix
affects more than 500,000 women worldwide each year. In March
2008, we commenced our U.S. clinical trials for our APTIMA
HPV assay. In addition, in May 2008 we launched our APTIMA HPV
assay in Europe.
Blood
Screening Products
In 1996, the National Heart, Lung and Blood Institute of the NIH
selected us to develop reagents and instrumentation for the
blood donor screening market based on our core technologies. We
completed our development of the NAT assays for HIV-1 and HCV
for blood screening contemplated by the NIH contract in February
2002 incorporating our core technologies of target capture, TMA
and DKA. The principal blood screening products that we have
developed are set forth below.
Blood
Screening Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target
|
|
|
FDA
|
|
|
Commercial
|
Product Line
|
|
|
Principal Technologies
|
|
|
Microorganism(s)
|
|
|
Clearance/Approval
|
|
|
Distribution
|
Procleix HIV-1/ HCV Assay
|
|
|
Target Capture, Transcription-Mediated Amplification of viral
RNAs, detection by Dual Kinetic Assay
|
|
|
HIV-1 and HCV in donated blood, plasma, organs and tissues
|
|
|
February 2002
|
|
|
Novartis
Worldwide
|
Procleix WNV Assay
|
|
|
Target Capture, Transcription-Mediated Amplification of viral
RNAs, detection by Dual Kinetic Assay
|
|
|
WNV in donated blood, plasma, organs and tissues
|
|
|
December 2005
|
|
|
Novartis U.S.
|
Procleix Ultrio Assay
|
|
|
Target Capture, Transcription-Mediated Amplification of viral
RNAs, detection by Dual Kinetic Assay
|
|
|
HIV-1, HCV and HBV in donated blood, plasma, organs and tissues
|
|
|
October 2006 (without blood screening claim for HBV)
August 2008 (with blood screening claim for HBV)
|
|
|
Novartis Worldwide
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 1998, in collaboration with Chiron (now Novartis), we were
selected by The American Red Cross to provide an HIV-1/HCV assay
for testing pooled blood samples under an Investigational New
Drug application, or IND, filed with the FDA. The American Red
Cross is the largest supplier of blood, plasma and tissue
products in the United States. The Gen-Probe/Novartis
collaboration subsequently entered into similar arrangements
with Americas Blood Centers and American Independent Blood
Centers. As a result of these and other implementations, we
estimate that the Procleix HIV-1/HCV assay is currently utilized
to screen over 80% of the United States donated blood supply.
The FDA approved our Biologic License Application, or BLA, for
the Procleix HIV-1/HCV assay in February 2002. As a result of
FDA approval, in the second quarter of 2002 Novartis began to
sell the assay at commercial prices to United States customers,
which resulted in our recognizing increased revenues.
Regulations adopted by the European Union, or EU, require all
imported in vitro diagnostic products, including our
existing blood screening assays, to be registered and contain
the CE mark. We received CE mark approval for our
initial Procleix HIV-1/HCV blood screening assay in February
2003.
20
As noted above, most blood collection centers currently screen
donated blood by taking samples from individual donors and then
conducting a nucleic acid test on the pooled samples. The
Procleix HIV-1/HCV assay is performed on the eSAS instrument
system, which provides sufficient throughput for screening
pooled samples of donated blood.
In collaboration with Novartis, we have developed the Procleix
Ultrio assay for the simultaneous detection of HIV-1, HCV and
HBV, which we believe will further drive demand for our blood
screening products. The test is distributed and marketed by
Novartis. The Procleix Ultrio assay is designed to detect the
presence of all known HIV-1 groups and subtypes and HCV and HBV
genotypes in human plasma during the very early stages of
infection, when those agents are present but cannot be detected
by immunoassays. The HBV component of the assay has the
potential to reduce the window period between infection and
detection of HBV by up to 42% from the window period associated
with new generation surface antigen tests. The Procleix Ultrio
assay for use on our semi-automated instrument for export was CE
marked in January 2004. In December 2004, the Procleix Ultrio
assay on TIGRIS was CE marked, enabling us to begin
commercialization of the Procleix Ultrio assay for use on the
TIGRIS instrument in the European Economic Area, as well as in
other parts of the world that accept the CE mark.
In October 2006 and May 2007, the FDA granted marketing approval
for use of the Procleix Ultrio assay on eSAS and TIGRIS,
respectively. The Procleix Ultrio assay was approved to screen
donated blood, plasma, organs and tissue for HIV-1 and HCV in
individual blood donations or in pools of up to 16 blood
samples. The systems and assay also detect HBV in blood
donations that are HBV-positive based on serology tests for HBV
surface antigen and core antibodies. In August 2008, the FDA
approved the Procleix Ultrio assay to also screen donated blood,
plasma, organs and tissues for HBV in individual blood donations
or in pools of up to 16 blood samples on eSAS and on the TIGRIS
system.
On December 1, 2005, the FDA granted marketing approval for
the Procleix WNV assay on eSAS to screen donated human blood.
The 510(k) clearance of eSAS for use with the WNV assay was
granted prior to the assays approval. In March 2007, the
FDA approved the Procleix TIGRIS system to screen donated blood,
organs and tissues for WNV using the Procleix WNV assay.
Products
for Emerging Diagnostic and Industrial Testing
Applications
With an aim to expand our offerings in the industrial testing
market, we entered into an exclusive collaboration agreement
with 3M in November 2006 to develop rapid molecular assays for
the food testing industry. In addition, with an aim to expand
our offerings in the clinical diagnostics market, we entered
into a separate exclusive collaboration agreement with 3M in
April 2007 to develop and commercialize rapid nucleic acid tests
to detect certain dangerous HCAIs, such as methicillin-resistant
Staphylococcus aureus. In November 2007, 3M informed us
that it no longer intended to fund our collaboration to develop
rapid molecular assays for the food testing industry. In June
2008, 3M discontinued our collaboration to develop rapid,
molecular tests for HCAIs due to technical incompatibilities
between our NAT technologies and 3Ms proprietary
microfluidics instrument platform. Prior to the termination of
these collaborations, we achieved certain technical milestones
with our prototype assays, entitling us to payments from 3M of
$2.0 million relating to our prototype assays to enhance
food safety and $2.7 million relating to our prototype
assays for HCAIs. We are currently exploring other opportunities
to commercialize our prototype assays in these fields.
In January 2008, Millipore commenced commercialization of the
first MilliPROBE assay under our collaboration, which targets
the bacterium Pseudomonas aeruginosa and is designed as
an in-process, early warning system to provide faster, more
effective detection of Pseudomonas aeruginosa in purified
water used during drug production. The assay is designed to
ensure a higher degree of water quality throughout manufacturing
processes where the contaminant can be a serious quality and
safety concern. We believe faster detection will enable
biopharmaceutical manufacturers to reduce downstream processing
risks, optimize product yields and improve final product quality.
Instrumentation
We have developed and continue to develop instrumentation and
software designed specifically for performing our NAT assays. We
also provide technical support and instrument service to
maintain these systems in the field.
21
Historically, we have provided our instrumentation to
laboratories and hospitals without requiring them to purchase
the equipment or enter into an equipment lease. Instead, we
recover the cost of providing the instrumentation in the amounts
we charge for our diagnostic assays. We have implemented
multi-year sales contracts that have an equipment factor
included in them. By placing our proprietary instrumentation in
laboratories and hospitals, we can establish a platform for
future sales of our assays. We also sell instruments to Novartis
for sale in the blood-screening market.
TIGRIS
Instrument System
We have developed the TIGRIS instrument system, or TIGRIS
instrument, which we believe is the first high-throughput
instrument to automate NAT testing, for use in both the clinical
diagnostic and blood screening markets. The TIGRIS instrument
integrates and automates all of the steps associated with our
latest amplified NAT assays, including sample preparation,
sample processing, amplification and detection. It has the
ability to process approximately 500 samples in an
eight-hour
shift and up to 1,000 samples in about 14 hours. In
addition, two TIGRIS instruments can be operated under the
supervision of a single lab technician.
The TIGRIS instrument is designed to reduce the time, labor
costs, risk of contamination and complexity associated with
performing NAT assays and blood screening. The throughput of the
TIGRIS instrument is sufficient to allow high volume testing of
individual blood donations, rather than pooled donor samples.
The TIGRIS instrument is being utilized in numerous blood banks,
as well as clinical diagnostic laboratories, which we believe is
helping to drive our growth in the STD testing market. We intend
to develop additional NAT assays that can be performed on the
TIGRIS instrument.
DTS
400, 800 and 1600 Instruments
Laboratories need nucleic acid testing solutions that are
accurate, efficient and economical. To meet this demand, we have
developed the family of DTS instruments. The DTS family of
instruments uses direct tube sampling (DTS) technology and an
exclusive penetrable cap on the sample collection tube to
minimize contamination and achieve safer, more convenient,
sample removal. DTS simplifies sample transport, minimizes
handling and greatly reduces laboratory cross-contamination.
These instruments include the DTS 400, DTS 800 and DTS 1600.
This is a full line of semi-automated solutions for low, medium
and high-volume laboratories to be used with our latest
generation of NAT assays, including the APTIMA Combo 2 assay.
The instrument platforms can also be adapted to perform the PACE
family of assays, GASDirect Test, and AccuProbe Group B Strep
assay.
Novartis markets a version of the DTS 1600 instruments, also
known as the Procleix System or eSAS, for use in blood screening
under the Procleix trademark. The version of the DTS instruments
that Novartis markets has received FDA approval and foreign
governmental approval in the countries where our blood screening
products are sold. Siemens markets systems comprised of
components of the DTS instruments for HCV clinical diagnostic
assays.
Luminometers
Our LEADER series of luminometers, designed in conjunction with
MGM Instruments, Inc., are used with our PACE, AccuProbe and
APTIMA products. Utilizing advanced chemiluminescent detection,
our luminometers provide high sensitivity, speed, accuracy and
ease-of-use. Currently, there is an installed base of over 2,100
of our luminometers worldwide. The LEADER series can accommodate
the throughput needs of low-volume testing laboratories. We have
no firm, long-term commitments from MGM Instruments to supply
products to us for any specific period, or in any specific
quantity, except as may be provided in a particular purchase
order. No FDA or foreign governmental approval is required to
sell our current LEADER series of luminometers in the clinical
diagnostic market.
Panther
Instrument System
We are currently developing a new automated instrument platform,
called the Panther instrument system, designed to bring the
benefits of full automation and a broad molecular diagnostics
menu to low to mid-volume customers. In July 2007, we authorized
Stratec Biomedical Systems AG, or Stratec, to commence its Phase
2
22
development activities pursuant to our development agreement.
Stratec is providing services for the design and development of
the Panther instrument system, as well as the production of
prototype, validation, pre-production and production instruments.
CUDA
Instrument System
Under our license agreement with Qualigen, we have conducted
feasibility research and development for a closed unit dose
assay, or CUDA, instrument and an associated reagent pouch. We
believe that a point-of-sample-collection instrument, such as
the CUDA instrument, may offer potential advantages in
industrial testing and other applications. We are currently
evaluating market opportunities, customer requirements and
instrument performance based on our research and development
activities to date.
Marketing
and Sales
We market our products for the clinical diagnostics market to
laboratories in the United States and Canada through our direct
sales force. We also market our APTIMA and PROGENSA PCA3
products in certain European countries through our direct sales
force. In other countries outside the United States, we rely on
distributors for our clinical diagnostic products. As of
December 31, 2008, our direct sales force consisted of a
staff of 39 sales employees. We also support our sales efforts
through a staff of 47 field technical employees. Our sales
representatives have an average of approximately 17 years
of overall sales experience, with an average of approximately
11 years focused on sales of NAT products. Sales
representatives principally focus on large accounts, including
reference laboratories, public health institutions and hospitals
throughout North America and certain European countries. We
educate our sales representatives on the technical, clinical and
economic merits of our products. We use sales meetings,
technical on-line sales training and in-the-field training to
ensure our sales representatives are properly informed about all
areas of our product lines and selling processes. Our blood
screening products are marketed and distributed by Novartis.
Marketing
Strategy
The focus of our marketing strategy is to solidify awareness of
the superiority of our technology, illustrate the cost
effectiveness of this technology and continue to differentiate
our products from those of our competitors. We target our
marketing efforts to various levels of laboratory and hospital
management through research publications, print advertisements,
conferences and the Internet. We attend various national and
regional industry conferences throughout the year. Our web site
is used to educate existing and potential customers about our
assays and contains our entire directory of products, on-line
technical materials and links to related medical sites.
Sales
Strategy
We concentrate our selling efforts on the management teams of
laboratories and hospitals. Our sales representatives are able
to recommend the appropriate business solution to meet the needs
of our customers by presenting multiple NAT technology and
instrumentation options. Sales representatives are trained to
find new product opportunities, offer diagnostic solutions to
address unmet customer needs, and provide comprehensive
after-sale product support. In addition, our field technical
support group provides training and ongoing technical support
for all of our NAT products.
Distributors
We have an agreement with bioMérieux for distribution of
certain of our microbial non-viral diagnostic products in Europe
and various countries in Asia (other than Japan), Australia,
South America and Mexico. We have an agreement for distribution
of our microbial non-viral diagnostic products in Japan with
Rebio Gen. In other countries, we utilize independent
distributors with experience and expertise in clinical
diagnostic products.
The blood screening products we manufacture under our
collaboration agreement with Novartis are marketed and
distributed solely by Novartis. Under our collaboration
agreement with Siemens, we and Siemens market our qualitative
assays for HCV and Siemens distributes ASRs for the quantitative
detection of the amount of HCV present in a sample.
23
Customers
The primary customers for our clinical diagnostic products
include large reference laboratories, public health institutions
and hospitals. Our blood screening collaboration with Novartis
accounted for 48% of our total revenues in 2008 and 45% of our
total revenues in 2007. Our blood screening collaboration with
Novartis is largely dependent on two large customers in the
United States, The American Red Cross and Americas Blood
Centers, but we do not receive any revenues directly from these
entities. Novartis was our only customer that accounted for
greater than 10% of our total revenues in 2008. Various state
and city public health agencies accounted for an aggregate of 8%
and 9%, respectively, of our total revenues in 2008 and 2007.
Although state and city public health agencies are legally
independent of each other, we believe they tend to act similarly
with respect to their purchasing decisions.
Corporate
Collaborations and Strategic Arrangements
Agreement
with Novartis (formerly Chiron Corporation)
In June 1998, we entered into a collaboration agreement with
Chiron Corporation (now Novartis), or the 1998 Agreement, to
develop and market NAT-based products for the blood screening
and clinical diagnostic markets. Chiron subsequently assigned
the clinical diagnostics portion of the agreement to Bayer
(which, in turn, assigned the clinical diagnostics portion of
the agreement to Siemens). The Gen-Probe/Novartis alliance
initially developed and is manufacturing and marketing the
combination HIV-1/HCV assay for qualitative screening of blood
and blood products under the Procleix name. Additional blood
screening assays, such as the Procleix Ultrio assay and the WNV
assay, have been developed through the collaboration and are
discussed elsewhere in this Annual Report. In the event that any
third-party technology is needed to continue development under
the collaboration agreement, costs for obtaining such
third-party technology will be allocated between the parties.
In January 2009, we entered into an agreement with Novartis to
amend the 1998 Agreement, effective as of January 1, 2009,
which we refer to herein as Amendment No. 11. Amendment
No. 11 extends to June 30, 2025 the term of the
parties blood screening collaboration under the 1998
Agreement. The 1998 Agreement was previously scheduled to expire
by its terms in 2013. The collaboration agreement can be
terminated by either party prior to the expiration of its term
if the other party materially breaches the collaboration
agreement and does not cure the breach following
90 days notice, or if the other party becomes
insolvent or declares bankruptcy.
The 1998 Agreement provided that we were solely responsible for
manufacturing costs incurred in connection with the
collaboration, while Novartis was responsible for sales and
marketing expenses associated with the collaboration. Amendment
No. 11 provides that, effective January 1, 2009, we
will recover 50% of our costs of goods sold incurred in
connection with the collaboration. In addition, we will receive
a percentage of the blood screening assay revenue generated
under the collaboration, as described in the next paragraph.
The 1998 Agreement provided that the parties share revenue from
the sale of blood screening assays under the collaboration.
Under the terms of the 1998 Agreement, as previously amended,
our share of revenue from any assay that included a test for HCV
was 45.75%. Amendment No. 11 modifies our share of such
revenue, initially reducing it to 44% for 2009. Our share of
blood screening assay revenue increases in subsequent years as
follows:
2010-2011,
46%;
2012-2013,
47%; 2014, 48%; and 2015, 50%. Our share of blood screening
assay revenue is fixed at 50% from January 1, 2015 though
the remainder of the amended term of the agreement. Under
Amendment No. 11, our share of blood screening assay
revenue from any assay that does not test for HCV remains at
50%. As discussed above, we are entitled to our designated
percentage of revenue from the sale of blood screening assays as
well as the recovery of 50% of our costs of goods sold.
Amendment No. 11 also provides that Novartis will reduce
the amount of time between product sales and payment of our
share of blood screening assay revenue from 45 days to
30 days.
As part of Amendment No. 11, the parties have agreed, and
Novartis has agreed to provide certain funding, to customize our
Panther instrument, a fully automated molecular testing platform
now in development, for use in the blood screening market.
Novartis has also agreed to pay us a milestone payment upon the
first commercial sale of the Panther instrument. The parties
will equally share any profit attributable to Novartis
sale or lease of Panther instruments under the collaboration.
The parties have also agreed to evaluate, using our
technologies, the development of companion diagnostics for
current or future Novartis medicines. Novartis has agreed to
provide certain funding to us in support of initial research and
development in this area.
24
All rights and title to inventions discovered under the
collaboration agreement belong to the party who developed the
invention, or to both parties, if both parties developed the
invention. However, if one party uses confidential information
relating to the core technology of the other party to develop an
invention that improves on, and whose use would infringe on, the
core technology of the other party, then the other party will
have the exclusive option to acquire all rights and title to the
invention on commercially reasonable terms, except in certain
situations where the invention will be jointly owned.
In January 2004, we began United States clinical trials of the
Procleix Ultrio assay on the TIGRIS instrument, triggering a
$6.5 million contract milestone payment from Novartis that
we recorded during the first quarter of 2004. During January
2004, the Procleix Ultrio assay, with our semi-automated
instrument, was CE marked, which permitted Novartis to launch
the product in the European Economic Area. In December 2004, the
Procleix Ultrio assay on TIGRIS was CE marked enabling the
commercialization of the Procleix TIGRIS system in the European
Economic Area, as well as in other parts of the world that
accept the CE mark. In October 2006 and May 2007, the FDA
granted marketing approval for use of the Procleix Ultrio assay
on eSAS and TIGRIS, respectively, to screen donated blood,
plasma, organs and tissue for HIV-1 and HCV in individual blood
donations or in pools of up to 16 blood samples. In August
2008, the FDA approved the Procleix Ultrio assay to screen
donated blood, plasma, organs and tissues for HBV in addition to
HCV and HIV-1 and, as a result, we received from Novartis a
$10.0 million milestone payment in the third quarter of
2008.
From inception through December 31, 2008, we recognized a
total of $1.1 billion in revenue under this collaboration
agreement and had recorded $3.0 million in deferred license
revenues as of December 31, 2008.
Agreement
with Siemens Healthcare Diagnostics, Inc. (formerly Bayer
Corporation)
In 1998, following the execution of our collaboration agreement
with Chiron Corporation (now Novartis), Chiron assigned the
clinical diagnostic portion of the agreement to Bayer. On
December 31, 2006, Bayer completed the sale of its
diagnostics division to Siemens AG and assigned the clinical
diagnostics portion of the agreement to Siemens Healthcare
Diagnostics, Inc. As a result of the settlement agreement we
entered into with Bayer in August 2006, or the Settlement
Agreement, which has also been assigned to Siemens and is
discussed below, the collaboration agreement has been
terminated, except as to quantitative ASRs and qualitative
assays for HCV as discussed below.
Under the terms of the 1998 Agreement, Siemens is obligated to
pay us a combination of transfer prices and royalties on product
sales with respect to the quantitative ASRs and qualitative
assays for HCV. From inception through December 31, 2008,
we recognized a total of $49.1 million in revenue under our
collaboration agreement with Siemens, including
$18.4 million in revenue during 2008, $16.4 million of
which as a one-time royalty payment we received in January 2008
under the Settlement Agreement described below.
In November 2002, we initiated an arbitration proceeding against
Bayer in connection with our collaboration. In August 2006, we
entered into the Settlement Agreement with Bayer, resolving all
litigation and arbitration proceedings between the parties. As
part of the Settlement Agreement, the parties submitted a
stipulated final award in the original November 2002 arbitration
proceeding we filed against Bayer, adopting the
arbitrators prior interim and supplemental awards, except
that Bayer was no longer obligated to reimburse us
$2.0 million for legal expenses. The arbitrators
June 5, 2005 Interim Award determined that we are entitled
to a co-exclusive right to distribute qualitative TMA assays to
detect HCV and HIV-1 for the remaining term of the collaboration
agreement between the parties on our DTS 400, 800, and 1600
instrument systems. The arbitrator also determined that the
collaboration agreement should be terminated, as we requested,
except as to the qualitative HCV assays and as to quantitative
ASRs for HCV. Siemens retains the co-exclusive right to
distribute the qualitative HCV tests and the exclusive right to
distribute the quantitative HCV ASR. As a result of the
termination of the agreement other than for these HCV tests, we
re-acquired the right to develop and market future viral assays
that had been previously reserved for Siemens. The
arbitrators March 3, 2006 supplemental award
determined that we are not obligated to pay an initial license
fee in connection with the sale of the qualitative HIV-1 and HCV
assays and that we will be required to pay running sales
royalties, at rates we believe are generally consistent with
rates paid by other licensees of the relevant patents. Pursuant
to the Settlement Agreement, Bayer paid us an initial license
fee of $5.0 million in August 2006, an additional
$10.3 million as a one-time royalty in January 2007 and a
final one-time royalty
25
payment of $16.4 million in January 2008. As a result of
these payments, Bayers rights to the patents subject to
the Settlement Agreement are fully
paid-up and
royalty free.
Pursuant to the Settlement Agreement, we have an option to
extend the term of the license granted in the arbitration for
qualitative HIV-1 and HCV assays, so that the license would run
through the life of the relevant HIV-1 and HCV patents. The
option also permits us to elect to extend the license to future
instrument systems (but not to the TIGRIS instrument). We are
required to exercise the option prior to expiration of the
existing license in October 2010 and, if exercised, pay a
$1.0 million fee.
Supply
and Purchase Agreement with Roche
In February 2005, we entered into a supply and purchase
agreement with F. Hoffman-La Roche Ltd. and its affiliate
Roche Molecular Systems, Inc., which we refer to collectively as
Roche. Under this agreement, Roche agreed to manufacture and
supply us with oligonucleotides for HPV. We plan to use these
oligonucleotides in molecular diagnostic assays. Pursuant to the
agreement, we paid Roche manufacturing access fees of
$20.0 million in May 2005 and $10.0 million in May
2008, upon the first commercial sale of our CE-marked APTIMA HPV
assay in Europe. We also agreed to pay Roche transfer fees for
the HPV oligonucleotides we purchase. The agreement terminates
upon the expiration of Roche patent rights relevant to the
agreement and may be terminated by either party upon a material
breach of the agreement by the other party that is not cured
following 60 days written notice and in certain other
limited circumstances.
In December 2006, Digene Corporation, or Digene, filed a demand
for binding arbitration against Roche with the International
Centre for Dispute Resolution of the American Arbitration
Association in New York, or ICDR. Digenes demand asserts,
among other things, that Roche materially breached a
cross-license agreement between Roche and Digene by granting us
an improper sublicense and seeks a determination that the supply
and purchase agreement is null and void. On July 13, 2007,
the ICDR arbitrators granted our petition to join the
arbitration. On August 27, 2007, Digene filed an amended
arbitration demand and asserted a claim against us for tortious
interference with the cross-license agreement. The arbitration
hearing in this matter commenced October 27, 2008 and the
presentation of evidence concluded November 10, 2008. In
December 2008 and January 2009, the parties filed post-hearing
briefs and closing arguments were presented on January 30,
2009.
Research
Agreement with GSK
In June 2005, we entered into a research agreement with
SmithKline Beecham Corporation, doing business as
GlaxoSmithKline, and SmithKline Beecham (Cork) Ltd., together
referred to as GSK. Under the terms of the agreement, we agreed
to provide GSK our investigational PCA3 assay to test up to
6,800 clinical samples obtained from patients enrolled in
GSKs
REDUCEtm
(REduction by DUtasteride of prostate Cancer Events) clinical
trial, which is designed to determine the efficacy and safety of
GSKs drug dutasteride
(AVODART®)
in reducing the risk of prostate cancer in men at increased risk
of this disease. We agreed to reimburse GSK for expenses that
GSK incurs for sample collection and related processes during
the four-year prospective clinical trial. We also agreed to
provide the PCA3 assay without charge and to pay third party
clinical laboratory expenses for using the assay to test the
samples. The agreement terminates on the earlier of six years
from the commencement date or two years after certain clinical
data is unblinded. GSK may terminate the agreement upon notice
to us and we may terminate the agreement on specific dates
provided certain conditions are met. Each party may also
terminate the agreement for material breaches and in certain
other limited circumstances. The agreement was amended in 2007
to expand its scope and include testing with our investigational
assay for the TMPRSS gene fusion.
Collaboration
Agreement with GEI
In July 2005, we entered into a collaboration agreement with GEI
to develop, manufacture and commercialize NAT products designed
to detect the unique genetic sequences of microorganisms for
GEIs exclusive use or sale in selected water testing
applications. Under the terms of the agreement, we will be
primarily responsible for assay development and manufacturing,
while GEI will manage worldwide commercialization of any
products resulting from the collaboration. The agreement
terminates on the later of the date that is 10 years after
the first commercial
26
sale or use of the first assay developed under the agreement and
five years after the first commercial sale or use of the last
assay launched prior to the 10 year period specified above.
In addition, either party may terminate the agreement upon a
breach of a material provision of the agreement by the other
party that is not cured following 90 days written
notice and in certain other limited circumstances.
Collaboration
Agreement with Millipore
In August 2005, we entered into a collaboration agreement with
Millipore to develop, manufacture and commercialize NAT products
for rapid microbiological and viral monitoring for
Millipores exclusive use or sale in process monitoring in
the biotechnology and pharmaceutical manufacturing industries.
Under the terms of the agreement, we will be primarily
responsible for assay development and manufacturing, while
Millipore will manage worldwide commercialization of any
products resulting from the collaboration. The agreement
terminates upon the expiration of any two-year period during
which there has been no development work conducted under the
agreement or no first commercial sale of a product developed
under the agreement. In addition, either party may terminate the
agreement upon a material breach of the agreement by the other
party that is not cured following 120 days written
notice and in certain other limited circumstances. Millipore
launched the first product under our collaboration in January
2008.
Agreements
with Molecular Profiling Institute, Inc.
In October 2005, we entered into agreements with Molecular
Profiling Institute, Inc., or Molecular Profiling, to accelerate
market development for our cancer diagnostics. Under the terms
of the agreements, Molecular Profiling has agreed to validate,
commercialize and undertake market development activities for up
to four of our products, starting with our ASRs to detect PCA3.
The agreements may be terminated, with required notice, upon a
material breach and in certain other limited circumstances. In
addition, we purchased $2.5 million of Series B
Preferred Stock of Molecular Profiling. Molecular Profiling was
acquired in January 2008 and we received approximately
$4.1 million in cash for our shares and as a result
realized approximately $1.6 million in gain for our
investment. Our commercial agreements with Molecular Profiling
(now Caris MPI, Inc.) remain in effect.
Agreements
with Stratec
In November 2006, we entered into a development agreement and
supply agreement with Stratec relating to our Panther instrument
system. The development agreement provides for the development
of a fully automated, mid-volume molecular diagnostic instrument
by Stratec. Stratec is providing services for the design and
development of the Panther instrument system at a fixed price of
$9.4 million, to be paid in installments due upon
achievement of specified technical milestones. In addition, we
will purchase prototype, validation, pre-production and
production instruments, at specified fixed transfer prices, that
will cost approximately $10.2 million in the aggregate if
we elect to purchase the number of each instrument type we
currently expect to purchase. We will also purchase production
tooling from Stratec at a cost of approximately
$1.2 million.
The development agreement provides that until 90 days
following our acceptance of prototype Panther instruments, we
have the right to terminate the agreement on limited, specified
conditions, upon 30 days written notice and payment of
specified termination compensation. Both parties have the right
to terminate the development agreement for insolvency of the
other party or for a material breach that is not cured within
80 days of written notice. Each of our rights and
obligations under the supply agreement are contingent upon
successful completion of the parties activities under the
development agreement. The supply agreement has an initial term
of 10 years. Both parties have the right to terminate the
supply agreement for insolvency of the other party or for a
material breach that is not cured within 80 days of written
notice.
Technology
Licenses
Licenses
of Our Technology We Have Granted to Other
Companies
Agreements with bioMérieux. In May 1997,
we entered into collaborative research agreements with
bioMérieux, which created a worldwide relationship between
bioMérieux and us.
27
In August 2000, we entered into amended agreements with
bioMérieux that transitioned the relationship from a
collaborative arrangement to two royalty-bearing license
agreements covering a semi-automated instrument and associated
probe assays and an advanced fully-automated instrument and
probe assays, both for the diagnosis of infectious diseases and
detection of food pathogens. In September 2004, we entered into
a termination agreement with bioMérieux, which terminated
one of the August 2000 license agreements. Pursuant to the
termination agreement, bioMérieux paid us an aggregate of
approximately $1.6 million to conclude certain outstanding
royalty and other obligations under the terminated license
agreement. Further, we paid $1.0 million to bioMérieux
to gain access to bioMérieuxs intellectual property
for detecting genetic mutations that predispose people to blood
clotting disorders. In February 2006, bioMérieux terminated
the second of the two August 2000 license agreements. In
December 2006, bioMérieux paid us $0.4 million in
settlement of a minimum annual royalty obligation under this
agreement, thereby fulfilling its final obligations under the
terminated license.
In September 2004, at the same time we entered into the first
termination agreement referenced above, we also entered into
non-exclusive licensing agreements with bioMérieux and its
affiliates that provide bioMérieuxs affiliates with
options to access our rRNA technologies for certain uses. We
refer to these agreements as the Easy Q agreement and the
GeneXpert agreement. Pursuant to the terms of these agreements,
bioMérieuxs affiliates paid us an aggregate of
$0.3 million for limited non-exclusive, non-transferable,
research licenses, without the right to grant sublicenses except
to affiliates, and non-exclusive, non-transferable options for
licenses to develop diagnostic products for certain disease
targets using our patented ribosomal RNA technologies. The first
of these options was exercised by bioMérieuxs
affiliates payment to us of $4.5 million in January
2005. In December 2005, bioMérieuxs affiliates
exercised a second option and paid us $2.1 million. We
recognized an aggregate of $3.9 million as license revenue
in 2005 as a result of these payments. bioMérieuxs
affiliates had an option to pay $1.0 million by
December 31, 2006 for access to additional targets, but did
not exercise this option. As a result of the expiration of this
option period, we recognized a total of $3.0 million as
revenue in 2006 for amounts previously paid by bioMérieux
but deferred.
Under each license, we will receive royalties on the net sale of
any products bioMérieux and its affiliates develop using
our intellectual property. The resulting license agreements
terminate upon the expiration of the last to expire patent
covered by the agreement. In the event of a change in control
with respect to bioMérieux or its affiliates, we have the
right to terminate these agreements, and the respective licenses
granted to bioMérieuxs affiliates thereunder, upon
60 days prior written notice to bioMérieux delivered
within six months of the date of the change in control. The
respective obligations of bioMérieuxs affiliates
under the agreements is guaranteed by bioMérieux SA, the
parent company of the bioMérieux affiliates that are
parties to the agreements.
License Agreement with Rebio Gen. In July
2001, we entered into a license agreement with Chugai
Diagnostics Science Co., Ltd., a subsidiary of our parent
corporation at that time. In September 2002, Chugai Diagnostics
Science Co., Ltd. was acquired by Fujirebio, which re-named the
company Rebio Gen, Inc. The license agreement has an initial
term of 10 years, with automatic renewal for consecutive
one year terms unless one party gives the other party notice
90 days prior to the end of the current term. Under the
terms of this agreement, Rebio Gen has a non-exclusive license
for Japan in the field of human clinical diagnostics to various
of our proprietary technologies, including TMA and HPA
technology. All rights and title to any discovery, invention or
improvement made by Rebio Gen as a result of access to our
patent rights licensed under the agreement belong solely to
Rebio Gen. We received a license fee and a royalty payment for
sales made prior to the effective date of the agreement and will
receive royalty payments from products incorporating the
licensed technology, including those developed and
commercialized by Rebio Gen, until the expiration of our patents
incorporated in these products, which is expected to occur in
December 2020. From inception through December 31, 2008, we
recognized a total of $3.9 million in revenue under this
agreement, including $0.4 million in revenue during 2008.
This agreement may be terminated by either party upon breach of
the agreement that is not cured following 60 days
written notice. We also received rights to distribute outside of
Japan any products that may be developed by Rebio Gen under the
license.
Non-Exclusive License with Becton Dickinson and
Company. In September 1995, we granted Becton
Dickinson a non-exclusive worldwide license to make, have made,
use, sell and import products that utilize rRNA for the
diagnosis of vaginosis and vaginitis in humans. Becton Dickinson
paid us an up-front license fee and has agreed to pay us
royalties for the life of the licensed patents. From inception
through December 31, 2008, we recognized a total of
$8.3 million in revenue under this agreement, including
$1.7 million in revenue during 2008.
28
Becton Dickinsons obligations to make royalty payments
under this agreement terminate when the patents that are the
subject of this agreement expire, which is expected to occur in
March 2015. Becton Dickinson can terminate the agreement at any
time on
30-days
prior written notice.
Cross Licensing Agreements with Tosoh. In
December 2003, we entered into agreements with Tosoh Corporation
to cross-license intellectual property covering certain NAT
technologies. The licenses, which were effective January 1,
2004, cover products in clinical diagnostics and other related
fields. Under the agreements, Tosoh received non-exclusive
rights to our proprietary TMA and rRNA technologies in exchange
for two payments to us totaling $7.0 million in 2004. We
also received a $1.0 million payment from Tosoh in 2006 as
the terms of our license agreement were expanded in connection
with the Bayer settlement. Additionally, Tosoh will pay us
royalties on worldwide sales of any products that employ our
technologies licensed by Tosoh. We will gain access, in exchange
for royalty payments to Tosoh, to Tosohs patented TRC
amplification and INAF detection technologies for use with our
real time TMA. The agreements terminate at various times
commencing in July 2010 through the expiration of the last to
expire patents subject to the agreements and may be terminated
by either party upon material breach of the agreement by the
other party that is not cured following 60 days
written notice.
Licenses
We Have Obtained to Third-Party Technology
Co-Exclusive License from Stanford
University. In August 1988, we obtained a license
from Stanford University granting us rights under specified
patent applications covering certain nucleic acid amplification
methods related to TMA. This license was amended in April 1997.
Under the amended license agreement, we are the co-exclusive
worldwide licensee of the Stanford amplification technology,
with Organon Teknika as the only other permitted Stanford
licensee. We paid a license fee and are obligated to make
royalty payments to Stanford based on net sales of products
incorporating the licensed technology, subject to a minimum
annual royalty payment. From inception through December 31,
2008, we incurred a total of $11.7 million in expenses
under this agreement, including $3.0 million in expenses
during 2008. Our obligation to make royalty payments under this
agreement terminates when the patents constituting the Stanford
amplification technology expire, which is expected to occur in
July 2017. This agreement may be terminated by Stanford upon a
material breach of the agreement by us that is not cured
following 60 days written notice.
Non-Assertion Agreement with Organon Teknika
B.V. In February 1997, we entered into a
non-assertion agreement with Organon Teknika. Both parties
possessed certain rights regarding transcription-based
amplification methods. The agreement allows both parties to
practice their respective amplification methods with immunity
from legal action from the other party for actually or allegedly
infringing each others patent rights. The agreement
terminates upon the expiration of the last of the patent rights
that are subject to the agreement, which is expected to occur in
July 2017. This agreement also may be terminated by Organon
Teknika upon a material breach of the agreement by us that is
not cured following 90 days written notice. In July
2001, Organon Teknika merged with bioMérieux.
Non-Exclusive License from Vysis, Inc. In June
1999, we obtained a non-exclusive license from Vysis granting us
rights under certain patents covering methods that combine
target capture technology with certain nucleic acid
amplification methods. We paid a license fee and became
obligated to make royalty payments to Vysis based on sales of
products incorporating the licensed technology. The agreement
terminates upon the expiration of the last of the patent rights
that are subject to the agreement, which is expected to occur in
July 2015. In December 2001, Vysis was acquired by Abbott
Laboratories, Inc., one of our principal competitors.
In September 2004, following litigation between the parties
concerning the scope, validity and enforceability of the
licensed patents, we entered into a settlement agreement and an
amendment to the non-exclusive license agreement. Under the
settlement agreement, we agreed to terminate the litigation and
pay Abbott an aggregate of $22.5 million. This aggregate
amount included $20.5 million for a fully paid up license
to eliminate all of our future royalty obligations under the
license, and $2.0 million for a fully
paid-up,
royalty-free license in additional fields under the licensed
patents. The
paid-up
license now covers current and future products in the field of
infectious diseases and all other fields. Novartis reimbursed us
$5.5 million of the $20.5 million allocated to the
cost of the fully
paid-up
license for the current field, commensurate with its obligation
to reimburse us for a portion of the royalties due on the sale
of blood screening products.
29
Non-Exclusive License with the Public Health Research
Institute of The City of New York, Inc. In June
1997, we entered into a royalty bearing non-exclusive license
with the Public Health Research Institute of The City of New
York, or PHRI, to utilize PHRIs fluorescently labeled NAT
technology. Under this agreement, which was amended in February
2006, we have worldwide rights to develop, use and market kits
in the field of human in vitro diagnostics, food
testing, environmental testing and industrial microbiology
testing. We paid a license fee and agreed to make milestone
payments and annual license fee payments, and to pay royalties
on the net sales price of products incorporating the licensed
technology, subject to a minimum annual royalty fee and a
reduction in the royalties based on the quantity of sales. From
inception through December 31, 2008, we incurred a total of
$2.2 million in license fees and $0.4 million in
milestone payments under this agreement. We anticipate that we
will pay up to an additional $1.0 million in milestone
payments over the remaining term of the agreement. The agreement
terminates upon the expiration of the last of the patent rights
that are subject to this agreement, which is expected to occur
in April 2017. The agreement may be terminated by PHRI upon a
material breach of the agreement that is not cured following
30 days written notice, or by us for any reason
following 30 days written notice.
Exclusive License with DiagnoCure. In November
2003, we entered into a license and collaboration agreement with
DiagnoCure under which we agreed to develop in collaboration
with DiagnoCure, and we agreed to market, a test to detect a new
gene marker for prostate cancer. The diagnostic test is directed
at a gene called PCA3 that has been shown by studies to be over
expressed in malignant prostate tissue. Under the terms of the
agreement, we paid DiagnoCure an upfront fee of
$3.0 million and paid additional fees and contract
development payments of $7.5 million over the three years
following execution of the contract. We received exclusive
worldwide distribution rights under the agreement to any
products developed by the parties under the agreement for the
diagnosis of prostate cancer, and agreed to pay DiagnoCure
royalties on any such products of 8% on cumulative net product
sales of up to $50.0 million, and royalties of 16% on
cumulative net sales above $50.0 million. We commenced
paying these royalties in 2006.
The agreement provides that we may lose exclusivity with respect
to the licensed PCA3 marker if we fail to diligently develop the
collaborative diagnostic test. This agreement expires, on a
country-by-country
basis, on the expiration of our obligation to pay royalties to
DiagnoCure, which obligation remains in effect as long as the
licensed products are covered by a valid claim of the licensed
patent rights. We may terminate the agreement for any reason
following 30 days written notice to DiagnoCure, or
following 30 days written notice to DiagnoCure in the
event a licensed product fails to produce a certain level of
results in any clinical trial.
In May 2006, we amended our license and collaboration agreement
with DiagnoCure. Pursuant to the terms of the amendment
(i) we granted exclusive rights to DiagnoCure to develop
in vivo products for the detection or measurement of PCA3
as a marker for the diagnosis, monitoring or prognosis of
prostate cancer, (ii) we granted co-exclusive rights to
DiagnoCure to develop fluorescence in situ hybridization
products for the detection or measurement of PCA3 as a marker
for the diagnosis, monitoring or prognosis of prostate cancer,
(iii) DiagnoCure agreed to undertake over a twelve-month
period the validation of genetic markers that we acquired under
our license agreement with Corixa Corporation, or Corixa, and we
agreed to make monthly payments to DiagnoCure for these
services, and (iv) we agreed to a new regulatory timeline
regarding our development obligations for an in vitro
diagnostic assay for PCA3. We currently plan to modify our
existing PCA3 assay for use with our investigational Panther
instrument system.
Exclusive License Option Agreement with Qualigen,
Inc. In November 2004, we entered into an
agreement with Qualigen under which we had an exclusive option
to develop and commercialize a NAT instrument designed for use
at the point of sample collection based on Qualigens
FDA-approved FastPack immunoassay system. If successfully
developed, the portable instrument would use our NAT technology
to detect, at the point of sample collection, the presence of
harmful microorganisms, genetic mutations and other markers of
diseases. Under the terms of the agreement, we paid Qualigen
$1.0 million for an
18-month
option to license, on an exclusive worldwide basis,
Qualigens technology to develop NAT assays for the
clinical diagnostics, blood screening and industrial fields. We
exercised the option in April 2006 and in conjunction therewith
purchased shares of Qualigen preferred stock convertible into
approximately 19.5% of Qualigens then outstanding fully
diluted common shares. The cost of acquiring this equity
interest was $7.0 million. In addition, we may pay Qualigen
up to $3.0 million in license fees based on development
milestones, as well as royalties on any eventual product sales.
Either party may
30
terminate the agreement for cause by written notice to the other
party of an uncured material breach by the other party or upon
certain insolvency events.
Exclusive License from AdnaGen AG. In December
2004, we entered into a license agreement with AdnaGen AG to
license from AdnaGen cell capture technology for use in our
molecular diagnostic tests to detect prostate and other cancers.
Under the terms of the agreement, we recorded license fees of
$1.75 million ($0.75 million in 2006 and
$1.0 million in 2004). We also agreed to pay AdnaGen up to
three milestone payments totaling an additional
$2.25 million based on the occurrence of certain clinical,
regulatory
and/or
commercial events. Further, we agreed to pay AdnaGen royalties
on net sales of any products developed by us using
AdnaGens technology. Additionally, we were granted options
through June 30, 2006, which term was later extended, to
obtain exclusive licenses to use AdnaGens technology in
molecular diagnostic tests for kidney, ovarian and cervical
cancers. We did not exercise these options. We retain a
three-year right of first negotiation to negotiate with AdnaGen
on exclusive rights to molecular diagnostic tests for breast,
colon and lung cancers in the event that AdnaGen proposes to
grant to any third party a license to AdnaGen technology for use
to detect any of these cancers. The agreement will expire on the
expiration of our obligation to pay royalties to AdnaGen under
the agreement, which obligation remains in effect as long as the
licensed products are covered by a valid claim of the licensed
technology. We may terminate the agreement in our sole
discretion upon 30 days prior written notice to AdnaGen,
provided we have made any outstanding payments required under
the agreement. Either party may terminate the agreement for
cause by written notice to the other party of an uncured
material breach by the other party or if the other party is
unable to pay its debts or enters into compulsory or voluntary
liquidation.
License Agreement with Corixa Corporation. In
January 2005, we entered into a license agreement with Corixa,
which was later acquired by GSK, pursuant to which we received
the right to develop and commercialize molecular diagnostic
tests for multiple potential genetic markers in the areas of
prostate, ovarian, cervical, kidney, lung and colon cancer.
Pursuant to the terms of the agreement, we paid Corixa an
initial access license fee of $1.6 million, and an
additional $1.6 million in each of February 2006 and
January 2007. Pursuant to the agreement, we also agreed to pay
Corixa milestone payments totaling an additional
$2.0 million on a
product-by-product
basis based on the occurrence of certain regulatory
and/or
commercial events. We also agreed to pay Corixa additional
milestone payments and royalties on net sales of any products
developed by us using Corixas technology. The agreement
will expire on the expiration of our obligation to pay royalties
to Corixa under the agreement, which obligation remains in
effect as long as the licensed products are covered by a valid
claim of the licensed patent rights. We may terminate the
agreement in our sole discretion upon 30 days prior
written notice to Corixa, provided we have made any outstanding
payments due under the agreement. Either party may terminate the
agreement for cause by written notice to the other party of an
uncured material breach by the other party or if the other party
is unable to pay its debts or enters into compulsory or
voluntary liquidation.
License Agreement with University of
Michigan. In April 2006, we entered into a
license agreement with the University of Michigan for exclusive
worldwide rights to develop and commercialize diagnostic tests
for recently discovered genetic translocations that have been
shown in preliminary studies to be highly specific for prostate
cancer tissue. In May 2006, pursuant to the terms of this
agreement, we paid a license fee of $0.5 million to the
University. We also agreed to pay royalties on eventual product
sales, as well as development milestones. In addition, we will
fund certain research at the University to discover other
potential prostate cancer translocations. The agreement will
terminate upon the expiration or abandonment of the last to
expire of the licensed patent rights. The University has the
right to terminate the agreement upon written notice to us if we
materially breach the agreement. We may terminate the agreement
upon 45 days written notice to the University,
provided we have paid all amounts owed to the University and
delivered reports and other data due and owing under the
agreement.
Patents
and Proprietary Rights
To establish and protect our proprietary technologies and
products, we rely on a combination of patent, copyright,
trademark and trade secrets laws, as well as confidentiality
provisions in our contracts.
We have implemented a patent strategy designed to maximize our
intellectual property rights. We have obtained and are currently
pursuing patent coverage in the United States and those foreign
countries that are home to
31
the majority of our anticipated customer base. As of
December 31, 2008, we owned more than 470 issued United
States and foreign patents. In addition, our patent portfolio
includes pending patent applications in the United States and
corresponding international filings in major industrial nations.
United States utility patents issued from applications filed
prior to June 8, 1995 have a term of the longer of
20 years from the earliest priority date or 17 years
from issue. United States utility patents issued from
applications filed on or after June 8, 1995 have a term of
20 years from the earlier of the application filing date or
earlier claimed priority date of a regular application. 108 of
our current United States utility patents issued from
applications filed prior to June 8, 1995. 135 of our United
States utility patents issued from applications filed on or
after June 8, 1995. We have four United States design
patents that issued from applications filed on or after
June 8, 1995 and have a term of 14 years from the date
of issue. Patents in most foreign countries have a term of
20 years from the date of filing of the patent application.
Because the time from filing to issuance of patent applications
is often several years, this process may result in a shortened
period of patent protection, which may adversely affect our
ability to exclude competitors from our markets. The last of our
currently issued patents will expire by December 8, 2025.
Our continued success will depend to a significant degree upon
our ability to develop proprietary products and technologies and
to obtain patent coverage for those products and technologies.
We intend to continue to file patent applications covering any
novel and newly developed products and technologies.
On January 9, 2004, our basic patents covering detection of
organisms using probes to ribosomal nucleic acid (the Kohne
patents) expired in countries outside North America. While we
have additional patents relating to ribosomal nucleic acid
detection that remain in effect outside North America, these
patents may not provide sufficiently broad protection to prevent
competitors from selling products based on ribosomal nucleic
acid detection in markets outside North America. In the United
States, the last-to-expire of the Kohne patents remains in
effect until March 3, 2015.
We also rely in part on trade secret protection for our
intellectual property. We attempt to protect our trade secrets
by entering into confidentiality agreements with third parties,
employees and consultants. The source code for our proprietary
software is protected both as a trade secret and as copyrighted
work. Our employees also sign agreements requiring that they
assign to us their interests in inventions and original
expressions and any corresponding patents and copyrights arising
from their work for us. However, it is possible that these
agreements may be breached, invalidated or rendered
unenforceable, and if so, there may not be an adequate
corrective remedy available.
Competition
The medical diagnostics and biotechnology industries are subject
to intense competition. Our competitors in the United States and
abroad are numerous and include, among others, diagnostic,
health care, pharmaceutical and biotechnology companies. Our
major competitors in the NAT market include Roche, Abbott
Laboratories, through its subsidiary Abbott Molecular Inc. or,
collectively, Abbott, Becton Dickinson, Siemens and
bioMérieux. All of these companies are manufacturers of
laboratory-based tests and instruments for the NAT market, and
we believe that many of these companies are developing automated
systems similar to our TIGRIS instrument.
Many of our competitors have substantially greater financial,
technical, research and other resources and larger, more
established marketing, sales, distribution and service
organizations than we do. Moreover, many of our competitors
offer broader product lines and have greater brand recognition
than we do, and offer price discounts as a competitive tactic.
In addition, our competitors, many of which have made
substantial investments in competing technologies, may limit or
interfere with our ability to make, use or sell our products
either in the United States or in international markets.
In the markets for clinical diagnostic products, a number of
competitors, including Roche, Abbott, Becton Dickinson, Siemens
and bioMérieux, compete with us for product sales,
primarily on the basis of technology, quality, reputation,
accuracy, ease of use, price, reliability, the timing of new
product introductions and product line offerings. Our
competitors may be in better position to respond quickly to new
or emerging technologies, may be able to undertake more
extensive marketing campaigns, may adopt more aggressive pricing
policies and may be more successful in attracting potential
customers, employees and strategic partners than we are. In the
areas of NAT diagnostics for STDs, Roche and Becton Dickinson
currently have FDA-approved tests for chlamydia infections
32
and gonorrhea utilizing amplification technology. Although we
believe that the APTIMA Combo 2 test has commercial advantages
over the competing tests from Roche, Becton Dickinson and
others, these competitors and potential competitors may be able
to develop technologies that are as effective as, or more
effective, or easier to interpret or less expensive than, those
offered by us, which would render our products uncompetitive or
obsolete.
Competitors may make rapid technological developments that may
result in our technologies and products becoming obsolete before
we recover the expenses incurred to develop them or before they
generate significant revenue or market acceptance. Some of our
competitors have developed real time or kinetic
nucleic acid assays and semi-automated instrument systems for
those assays. Additionally, some of our competitors are
developing assays that permit the quantitative detection of
multiple analytes, or quantitative multiplexing. Although we are
evaluating
and/or
developing such technologies, we believe some of our competitors
are further along in the development process than we are with
respect to such assays and instrumentation.
In the market for blood screening products, our primary
competitor is Roche, which received FDA approval of its
PCR-based NAT tests for blood screening in December 2002. We
also compete with assays developed internally by blood
collection centers and laboratories based on PCR technology, an
HCV antigen assay marketed by Ortho Clinical Diagnostics, a
subsidiary of Johnson & Johnson, and immunoassay
products from Abbott and Siemens. In the future, our blood
screening products may compete with viral inactivation or
reduction technologies and blood substitutes.
Novartis, with whom we have a collaboration agreement for our
blood screening products, retains certain rights to grant
licenses of the patents related to HCV and HIV to third parties
in blood screening using NAT. Prior to its merger with Novartis,
Chiron granted HIV and HCV licenses to Roche in the blood
screening and clinical diagnostics fields. Chiron also granted
HIV and HCV licenses in the clinical diagnostics field to Bayer
Healthcare LLC (now Siemens), together with the right to grant
certain additional HIV and HCV sublicenses in the field to third
parties. We believe that Bayers rights have now been
assigned to Siemens as part of Bayers December 2006 sale
of its diagnostics business. Chiron also granted an HCV license
to Abbott and an HIV license to Organon Teknika (now
bioMérieux) in the clinical diagnostics field. If Novartis
grants additional licenses in blood screening or Siemens grants
additional licenses in clinical diagnostics, further competition
will be created for sales of HCV and HIV assays and these
licenses could affect the prices that can be charged for our
products.
Government
Regulation
Our clinical diagnostic products generally are classified in the
United States as devices and are regulated by the
FDAs Center for Devices and Radiological Health. Our blood
screening products generally are classified in the United States
as biologics and are regulated by the FDAs
Center for Biologics Evaluation and Research.
For us to market our clinical diagnostic product kits as medical
devices in the United States, we generally must first obtain
clearance from the FDA pursuant to Section 510(k) of the
Federal Food, Drug, and Cosmetic Act, or FFDCA. If we modify our
products that already have received FDA clearance, the FDA may
require us to submit a separate 510(k), a special
510(k) or a premarket approval application, or PMA, for the
modified product before we are permitted to market it in the
United States. In addition, if we develop products in the future
that are not considered to be substantially equivalent to a
legally marketed device, we will be required to obtain FDA
approval by submitting a PMA.
By regulation, the FDA is required to respond to a 510(k) within
90 days of submission of the application. As a practical
matter, final clearance often takes longer. The FDA may require
further information, including additional clinical data, to make
a determination regarding substantial equivalence. If the FDA
determines that the device, or its intended use, is not
substantially equivalent, the device sponsor must
then fulfill much more rigorous premarketing requirements or
re-submit a new 510(k) with additional data.
The PMA process is more demanding than the 510(k) premarket
notification process. A PMA application, which is intended to
demonstrate that the device is safe and effective, must be
supported by extensive data, including data from preclinical
studies, human clinical trials and existing research material,
and must contain a full description of the device and its
components, a full description of the methods, facilities and
controls used for manufacturing, and proposed labeling. The FDA
has 180 days to review a filed PMA application, although
the
33
review of an application more often occurs over a significantly
longer period of time, up to several years. In approving a PMA
application or clearing a 510(k) application, the FDA also may
require some form of post-market surveillance, whereby the
manufacturer follows certain patient groups for a number of
years and makes periodic reports to the FDA on the clinical
status of those patients when necessary to protect the public
health or to provide additional safety and effectiveness data
for the device. Our diagnostic assays for HCV and tuberculosis
are examples of successful PMA applications.
When FDA approval of a clinical diagnostic device requires human
clinical trials, and if the device presents a significant
risk (as defined by the FDA) to human health, the device
sponsor is required to file an investigational device exemption,
or IDE, application with the FDA and obtain IDE approval prior
to commencing the human clinical trial. If the device is
considered a non-significant risk, IDE submission to
the FDA is not required. Instead, only approval from the
Institutional Review Board overseeing the clinical trial is
required.
Clinical trials must be conducted in accordance with Good
Clinical Practice under protocols generally submitted to the
FDA. Our clinical department has comprehensive experience with
clinical trials of NAT products.
After the FDA permits a device to enter commercial distribution,
numerous regulatory requirements apply. In addition to potential
product specific post-approval requirements, all devices are
subject to:
|
|
|
|
|
the Quality System Regulation, which requires manufacturers to
follow comprehensive design, testing, control, documentation and
other quality assurance procedures during the manufacturing
process;
|
|
|
|
labeling regulations;
|
|
|
|
the FDAs general prohibition against promoting products
for unapproved or off-label uses; and
|
|
|
|
the Medical Device Reporting regulation, which requires that
manufacturers report to the FDA if their device may have caused
or contributed to a death or serious injury or malfunctioned in
a way that would likely cause or contribute to a death or
serious injury if it were to reoccur.
|
Failure to comply with the applicable United States medical
device regulatory requirements could result in, among other
things, warning letters, fines, injunctions, civil penalties,
repairs, replacements, refunds, recalls or seizures of products,
total or partial suspension of production, the FDAs
refusal to grant future premarket clearances or approvals,
withdrawals or suspensions of current product applications,
suspension of export certificates and criminal prosecution.
Our blood screening products also are subject to extensive pre-
and post-market regulation as biologics by the FDA, including
regulations that govern the testing, manufacturing, safety,
efficacy, labeling, storage, record keeping, advertising and
promotion of the products under the FFDCA and the Public Health
Services Act, and by comparable agencies in most foreign
countries. The process required by the FDA before a biologic may
be marketed in the United States generally involves the
following:
|
|
|
|
|
completion of preclinical testing;
|
|
|
|
submission of an IND, which must become effective before
clinical trials may begin; and
|
|
|
|
performance of adequate and well controlled human clinical
trials to establish the safety and effectiveness of the proposed
biologics intended use.
|
The FDA requires approval of a BLA before a licensed biologic
may be legally marketed in the United States. Product approvals
may be withdrawn or suspended if compliance with regulatory
standards is not maintained or if problems occur following
initial marketing. With respect to patented products or
technologies, delays imposed by the governmental approval
process may materially reduce the period during which we will
have exclusive rights to exploit them.
The results of product development and human studies are
submitted to the FDA as part of each BLA. The BLA also must
contain extensive manufacturing information. The FDA may approve
or disapprove a BLA if applicable FDA regulatory criteria are
not satisfied or it may require additional clinical data. If
approved, the FDA may withdraw a product approval if compliance
with post-market regulatory standards is not maintained or if
problems occur after the product reaches the marketplace. In
addition, the FDA may require post-marketing studies
34
to monitor the effect of approved products, and may limit
further marketing of the product based on the results of these
post-market studies. The FDA has broad post-market regulatory
and enforcement powers.
Satisfaction of FDA pre-market approval requirements for
biologics can take several years and the actual time required
may vary substantially based on the type, complexity and novelty
of the product or disease. In general, government regulation may
delay or prevent marketing of potential products for a
considerable period of time and impose costly procedures upon
our activities. Success in early stage clinical trials does not
assure success in later stage clinical trials. Data obtained
from clinical activities is not always conclusive and may be
susceptible to varying interpretations that could delay, limit
or prevent regulatory approval. Even if a product receives
regulatory approval, later discovery of previously unknown
problems with a product may result in restrictions on the
product or even complete withdrawal of the product from the
market.
With respect to post-market product advertising and promotion,
the FDA imposes a number of complex regulations on entities that
advertise and promote biologics, which include, among others,
standards and regulations for direct-to-consumer advertising,
off-label promotion, industry sponsored scientific and
educational activities, and promotional activities involving the
Internet. The FDA has broad enforcement authority under the
FFDCA, and failure to abide by applicable FDA regulations can
result in penalties including the issuance of a warning letter
directing the entity to correct deviations from FDA standards, a
requirement that future advertising and promotional materials be
pre-cleared by the FDA, and state and federal civil and criminal
investigations and prosecutions.
We and our contract medical product manufacturers are subject to
periodic inspection by the FDA and other authorities where
applicable, and are required to comply with the applicable FDA
current Good Manufacturing Practice regulations. Good
Manufacturing Practice regulations include requirements relating
to quality control and quality assurance, as well as the
corresponding maintenance of records and documentation, and
provide for manufacturing facilities to be inspected by the FDA.
Manufacturers of biologics also must comply with the FDAs
general biological product regulations. These regulations often
include lot release testing by the FDA.
Certain assay reagents may be sold as ASRs without 510(k)
clearance or PMA approval. However, ASR products are subject to
significant restrictions. The manufacturer may not make
performance claims for the product and may only sell the product
to clinical laboratories that are qualified to run high
complexity tests under the Clinical Laboratory Improvement
Amendments of 1988, or CLIA. Each laboratory must validate the
ASR product for use in diagnostic procedures as a laboratory
validated assay. We currently offer ASRs for use in the
detection of the PCA3 gene and for use in the detection of the
parasite Trichomonas vaginalis. In September 2007, the
FDA published guidance for ASRs that define the types of
products that can be sold as ASRs. Under the terms of this
guidance and the ASR Manufacturer Letter issued in
June 2008 by the Office of In Vitro Diagnostic Device Evaluation
and Safety at the FDA, it may be more challenging for us to
market some of our ASR products and we may be required to
terminate those ASR product sales, conduct clinical studies and
make submissions of our products to the FDA for clearance or
approval.
Outside the United States, our ability to market our products is
contingent upon maintaining our International Standards
Organization (ISO) certification, and in some cases receiving
specific marketing authorization from the appropriate foreign
regulatory authorities. The requirements governing the conduct
of clinical trials, marketing authorization, pricing and
reimbursement vary widely from country to country. Our EU
product registrations cover all member states. Foreign
registration is an ongoing process as we register additional
products
and/or
product modifications.
We are also subject to various state and local laws and
regulations in the United States relating to laboratory
practices and the protection of the environment. In each of
these areas, as above, regulatory agencies have broad regulatory
and enforcement powers, including the ability to levy fines and
civil and criminal penalties, suspend or delay issuance of
approvals, seize or recall products, and withdraw approvals, any
one or more of which could have a material adverse effect upon
us. In addition, in the course of our business, we handle, store
and dispose of chemicals. The environmental laws and regulations
applicable to our operations include provisions that regulate
the discharge of materials in the environment. Usually these
environmental laws and regulations impose strict
liability, rendering a person liable without regard to
negligence or fault on the part of, or conditions caused by,
others. We have not been required to expend material amounts in
connection with our efforts to comply with environmental
requirements. Because the requirements imposed by these laws and
regulations frequently change,
35
we are unable to predict the cost of compliance with these
requirements in the future, or the effect of these laws on our
capital expenditures, results of operations or competitive
positions.
Manufacturing
and Raw Materials
We have two state-of-the-art manufacturing facilities in the
United States. Our Mira Mesa manufacturing facility in
San Diego, California is dedicated to producing our
clinical diagnostic products. In 1999, we completed our
manufacturing facility in Rancho Bernardo for the manufacture of
our blood screening products. This facility meets the strict
standards set by the FDAs Center for Biologics Evaluation
and Research for the production of blood screening products. We
built this facility with the capability to expand its operations
to include production of additional assays for the blood
screening market. We believe this facility has the capacity to
produce sufficient tests to satisfy current and foreseeable
demand for these blood screening assays. On February 1,
2008, we completed the purchase of this facility for
$15.7 million. We also have a manufacturing facility in
Cardiff, United Kingdom. We believe that our existing
manufacturing facilities provide us with capacity to meet the
needs of our currently anticipated growth.
We store our finished products at our warehouses in our
manufacturing facilities. Some of our products must be stored in
industrial refrigeration or freezer units that are on site. We
ship our products under ambient, refrigerated or frozen
conditions, as necessary, through third-party service providers.
We rely on one contract manufacturer for the production of each
of our instrument product lines. For example, KMC Systems is the
only manufacturer of our TIGRIS instrument, and MGM Instruments
is the only manufacturer of our LEADER series of luminometers.
We have no firm long-term commitments from KMC Systems, MGM
Instruments or any of our other manufacturers to supply products
to us for any specific period, or in any specific quantity,
except as may be provided in a particular purchase order.
We use a diverse and broad range of raw materials in the design,
development and manufacture of our products. Although we produce
some of our materials on site at our manufacturing facilities,
we purchase most of the materials and components used to
manufacture our products from external suppliers. In addition,
we purchase many key raw materials from single source suppliers.
For example, our current supplier of key raw materials for our
amplified NAT assays, pursuant to a fixed-price contract, is the
Roche Molecular Biochemicals Division of Roche Diagnostics GmbH,
an affiliate of Roche Molecular Diagnostics, which is one of our
primary competitors. In addition, we have entered into a supply
and purchase agreement with F. Hoffmann-La Roche Ltd. and
its affiliate Roche Molecular Systems, Inc. for the manufacture
and supply of probes for HPV. We work closely with our suppliers
to assure continuity of supply while maintaining high quality
and reliability. Although we generally consider and identify
alternative suppliers, we do not typically pursue alternative
sources due to the strength of our existing supplier
relationships.
Quality
Systems
We have implemented modern quality systems and concepts
throughout our organization. Our regulatory and quality
assurance departments supervise our quality systems and are
responsible for assuring compliance with all applicable
regulations, standards and internal policies. Our senior
management team is actively involved in setting quality
policies, managing regulatory matters and monitoring external
quality performance.
Our regulatory and quality assurance departments have
successfully led us through multiple quality and compliance
audits by the FDA, foreign governments and customers. These
departments also coordinated an audit by TÜV Rheinland of
North America, leading to our European Standard, EN 13485,
certification. TÜV Rheinland of North America also
functions as our notified body, performing dossier
reviews for some of our blood screening and diagnostic products
prior to obtaining the CE mark. In addition, our regulatory and
quality assurance departments have coordinated audits by Lloyds
Register Quality Assurance leading to EN ISO 13485, EN ISO 9001,
EN ISO 14001 and OHSAS 18001 certifications for our wholly owned
U.K. subsidiary, Molecular Light Technology Research Limited.
36
Research
and Development
As of December 31, 2008, we had 243 full-time and
temporary employees in research and development. Our research
and development expenses were $101.1 million in 2008,
$97.1 million in 2007 and $84.5 million in 2006.
Employees
As of December 31, 2008, we had 991 full-time
employees, of whom 208 hold advanced degrees. Of those
employees, 227 were in research and development, 139 were in
regulatory, clinical and quality systems, 177 were in sales and
marketing, 169 were in general and administrative and 279 were
in operations. None of our employees is covered by a collective
bargaining agreement, and we consider our relationship with our
employees to be good. In addition, as of December 31, 2008,
we had 46 temporary employees.
Geographic
Information
For geographic information regarding our revenues, see
Note 12 to the Consolidated Financial Statements included
in Part II, Item 8 of this Annual Report.
Our
quarterly revenue and operating results may vary significantly
in future periods and our stock price may decline.
Our operating results have fluctuated in the past and are likely
to continue to do so in the future. Our revenues are
unpredictable and may fluctuate due to changes in demand for our
products, the timing of the execution of customer contracts, the
timing of milestone payments, or the failure to achieve and
receive the same, and the initiation or termination of corporate
collaboration agreements. A significant portion of our costs
also can vary substantially between quarterly or annual
reporting periods. For example, the total amount of research and
development costs in a period often depends on the amount of
costs we incur in connection with manufacturing developmental
lots and clinical trial lots. Moreover, a variety of factors may
affect our ability to make accurate forecasts regarding our
operating results. For example, our new blood screening
products, oncology and industrial products, as well as some of
our clinical diagnostic products, have a relatively limited
sales history, which limits our ability to project future sales,
prices and the sales cycles accurately. In addition, we base our
internal projections of blood screening product sales and
international sales of various diagnostic products on
projections prepared by our distributors of these products and
therefore we are dependent upon the accuracy of those
projections. We expect continuing fluctuations in our
manufacture and shipment of blood screening products to
Novartis, which vary each period based on Novartis
inventory levels and supply chain needs. Because of all of these
factors, our operating results in one or more future quarters
may fail to meet or exceed financial guidance we may provide
from time to time and the expectations of securities analysts or
investors, which could cause our stock price to decline. In
addition, the trading market for our common stock will be
influenced by the research and reports that industry or
securities analysts publish about our business and that of our
competitors. Furthermore, failure to achieve our operational
goals may inhibit our targeted growth plans and the successful
implementation of our strategic objectives.
Our
financial performance may be adversely affected by current
global economic conditions.
Our business depends on the overall demand for our products and
on the economic health of our current and prospective customers.
Our projected revenues and operating results are based on
assumptions concerning certain levels of customer demand. We
have not experienced recent declines in overall blood screening
or clinical diagnostics customer purchases as a result of
current economic conditions, however, a continued weakening of
the global and domestic economy, or a reduction in customer
spending or credit availability, could result in downward
pricing pressures, delayed or decreased purchases of our
products and longer sales cycles. Furthermore, during
challenging economic times our customers may face issues gaining
timely access to sufficient credit, which could result in an
impairment of their ability to make timely payments to us. If
that were to occur, we may be required to increase our allowance
for doubtful accounts. If economic and market conditions in the
United States or other key
37
markets persist, spread, or deteriorate further, we may
experience adverse effects on our business, operating results
and financial condition.
We are
dependent on Novartis and other third parties for the
distribution of some of our products. If any of our distributors
terminates its relationship with us or fails to adequately
perform, our product sales will suffer.
We rely on Novartis to distribute blood screening products we
manufacture. Commercial product sales to Novartis accounted for
44% of our total revenues for 2008 and 43% of total revenues for
2007. As described above, Amendment No. 11 extends to
June 30, 2025 the term of our blood screening collaboration
with Novartis under the 1998 Agreement. The 1998 Agreement was
previously scheduled to expire by its terms in 2013. The
collaboration agreement can be terminated by either party prior
to the expiration of its term if the other party materially
breaches the collaboration agreement and does not cure the
breach following 90 days notice, or if the other
party becomes insolvent or declares bankruptcy.
In July 2008, we were notified that certain blood screening
assays manufactured by us for Novartis and sold outside of the
United States might have been improperly stored at a Novartis
third-party warehouse in Singapore. Following our established
quality system, an investigation for product performance was
initiated. in August 2008, we determined that, based on the
results of our investigation to date, we could not fully assess
the potential impact of these improper storage conditions on the
ultimate performance of the product without conducting
additional stability testing. As a result, we and Novartis
agreed that products previously delivered to customers from this
warehousing facility should be replaced and the appropriate
field actions were initiated with customers and the regulatory
authorities in the affected countries. While we do not expect to
incur charges in connection with this event, we devoted
considerable time and attention to rectifying the issues
resulting from the improper storage conditions and events such
as this may harm our commercial reputation.
Our agreement with Siemens, as assignee of Bayer, for the
distribution of certain of our products will terminate in 2010.
In November 2002, we initiated an arbitration proceeding against
Bayer in connection with our clinical diagnostic collaboration.
In August 2006, we entered into a settlement agreement with
Bayer regarding this arbitration and the patent litigation
between the parties. Under the terms of the settlement
agreement, the parties submitted a stipulated final award
adopting the arbitrators prior interim and supplemental
awards, except that Bayer was no longer obligated to reimburse
us $2.0 million for legal expenses previously awarded in
the arbitrators June 5, 2005 Interim Award. The
arbitrator determined that the collaboration agreement should be
terminated, as we requested, except as to the qualitative HCV
assays and as to quantitative Analyte Specific Reagents, or
ASRs, for HCV. As Bayers assignee, Siemens retains the
co-exclusive right to distribute the qualitative HCV tests and
the exclusive right to distribute the quantitative HCV ASR. As a
result of a termination of the collaboration agreement, we
re-acquired the right to develop and market future viral assays
that had been previously reserved for Siemens. The
arbitrators March 3, 2006 supplemental award
determined that we are not obligated to pay an initial license
fee in connection with the sale of the qualitative HIV-1 and HCV
assays and that we will be required to pay running sales
royalties, at rates we believe are generally consistent with
rates paid by other licensees of the relevant patents.
We rely upon bioMérieux for distribution of certain of our
products in most of Europe and Australia, Rebio Gen for
distribution of certain of our products in Japan, and various
independent distributors for distribution of our products in
other regions. Distribution rights revert back to us upon
termination of the distribution agreements. Our distribution
agreement with Rebio Gen terminates on December 31, 2010,
although it may terminate earlier under certain circumstances.
Our distribution agreement with bioMérieux terminates on
May 2, 2009, although it may terminate earlier under
certain circumstances.
If any of our distribution or marketing agreements is
terminated, particularly our collaboration agreement with
Novartis, or if we elect to distribute new products directly, we
will have to invest in additional sales and marketing resources,
including additional field sales personnel, which would
significantly increase future selling, general and
administrative expenses. We may not be able to enter into new
distribution or marketing agreements on satisfactory terms, or
at all. If we fail to enter into acceptable distribution or
marketing agreements or fail to successfully market our
products, our product sales will decrease.
38
If we
cannot maintain our current corporate collaborations and enter
into new corporate collaborations, our product development could
be delayed. In particular, any failure by us to maintain our
collaboration with Novartis with respect to blood screening
would have a material adverse effect on our
business.
We rely, to a significant extent, on our corporate collaborators
for funding development and for marketing many of our products.
In addition, we expect to rely on our corporate collaborators
for the commercialization of those products. If any of our
corporate collaborators were to breach or terminate its
agreement with us or otherwise fail to conduct its collaborative
activities successfully and in a timely manner, the development
or commercialization and subsequent marketing of the products
contemplated by the collaboration could be delayed or
terminated. We cannot control the amount and timing of resources
our corporate collaborators devote to our programs or potential
products. In November 2007, for example, 3M informed us that it
no longer intended to fund our collaboration to develop rapid
molecular assays for the food testing industry. We and 3M
subsequently terminated this agreement. In June 2008, 3M
discontinued our collaboration to develop assays for
healthcare-associated infections. While we are currently seeking
other opportunities to commercialize our prototype assays in
these fields, there is no guarantee we will be successful in
these efforts.
The continuation of any of our collaboration agreements depends
on their periodic renewal by us and our collaborators. For
example, we recently entered into Amendment No. 11 with
Novartis which extends to June 30, 2025 the term of our
blood screening collaboration with Novartis under the 1998
Agreement. The 1998 Agreement was previously scheduled to expire
by its terms in 2013. The collaboration agreement can be
terminated by either party prior to the expiration of its term
if the other party materially breaches the collaboration
agreement and does not cure the breach following
90 days notice, or if the other party becomes
insolvent or declares bankruptcy.
If any of our current collaboration agreements is terminated, or
if we are unable to renew those collaborations on acceptable
terms, we would be required to devote additional internal
resources to product development or marketing or to terminate
some development programs or seek alternative corporate
collaborations. We may not be able to negotiate additional
corporate collaborations on acceptable terms, if at all, and
these collaborations may not be successful. In addition, in the
event of a dispute under our current or any future collaboration
agreements, such as those under our agreements with Novartis and
Siemens, a court or arbitrator may not rule in our favor and our
rights or obligations under an agreement subject to a dispute
may be adversely affected, which may have an adverse impact on
our business or operating results.
We may
acquire other businesses or form collaborations, strategic
alliances and joint ventures that could decrease our
profitability, result in dilution to stockholders or cause us to
incur debt or significant expense, and acquired companies or
technologies could be difficult to integrate and could disrupt
our business.
As part of our business strategy, we intend to pursue
acquisitions of complementary businesses and enter into
technology licensing arrangements. We also intend to pursue
strategic alliances that leverage our core technology and
industry experience to expand our product offerings and
geographic presence. We have limited experience with respect to
acquiring other companies. Any future acquisitions by us could
result in large and immediate write-offs or the incurrence of
debt and contingent liabilities, any of which could harm our
operating results. Integration of an acquired company also may
require management resources that otherwise would be available
for ongoing development of our existing business. We may not
identify or complete these transactions in a timely manner, on a
cost-effective basis, or at all. For example, in July 2008 we
withdrew our counterbid to acquire Innogenetics NV as a result
of a higher offer made by Solvay Pharmaceuticals. Prior to
withdrawing our bid, our management devoted substantial time and
attention to the proposed transaction. Further, we nonetheless
incurred related transaction costs, including legal, accounting
and other fees.
In addition, in January 2009, we announced that we had made an
approximately $132.2 million cash offer (based on the
exchange rate described in the offer) for the acquisition of
Tepnel Life Sciences Plc, a company registered in England and
Wales, or Tepnel, pursuant to a court-sanctioned scheme of
arrangement under United Kingdom law. If successful, we believe
the acquisition will provide us access to growth opportunities
in transplant diagnostics, genetic testing and pharmaceutical
services, as well as accelerate our ongoing strategic efforts to
strengthen our marketing and sales, distribution and
manufacturing capabilities in the European molecular diagnostics
market. These expectations are based upon numerous assumptions
that are subject to risks and
39
uncertainties that could deviate materially from our estimates,
and could adversely affect our operating results. Some of these
risks and uncertainties include, but are not limited to, our
anticipated financial performance as a result of the acquisition
of Tepnel and estimated cost savings and other synergies as a
result of the acquisition of Tepnel. Also, our offer to acquire
Tepnel is subject to numerous conditions, including the scheme
becoming effective no later than four months form the posting of
the scheme document to Tepnel shareholders or such later date as
we and Tepnel may agree and the court may approve. It is also
possible that Tepnel could receive a competing acquisition offer
and its shareholders could decline to support the transaction.
Managing the proposed acquisition of Tepnel and any other future
acquisitions will entail numerous operational and financial
risks, including:
|
|
|
|
|
the inability to retain or replace key employees of any acquired
businesses or hire enough qualified personnel to staff any new
or expanded operations;
|
|
|
|
the impairment of relationships with key customers of acquired
businesses due to changes in management and ownership of the
acquired businesses;
|
|
|
|
the exposure to federal, state, local and foreign tax
liabilities in connection with any acquisition or the
integration of any acquired businesses;
|
|
|
|
the exposure to unknown liabilities;
|
|
|
|
higher than expected acquisition and integration costs that
could cause our quarterly and annual operating results to
fluctuate;
|
|
|
|
increased amortization expenses if an acquisition includes
significant intangible assets;
|
|
|
|
combining the operations and personnel of acquired businesses
with our own, which could be difficult and costly;
|
|
|
|
the risk of entering new markets; and
|
|
|
|
integrating, or completing the development and application of,
any acquired technologies and personnel with diverse business
and cultural backgrounds, which could disrupt our business and
divert our managements time and attention.
|
To finance any acquisitions, we may choose to issue shares of
our common stock as consideration, which would result in
dilution to our stockholders. If the price of our equity is low
or volatile, we may not be able to use our common stock as
consideration to acquire other companies. Alternatively, it may
be necessary for us to raise additional funds through public or
private financings. Additional funds may not be available on
terms that are favorable to us, especially in light of current
economic conditions.
Our
future success will depend in part upon our ability to enhance
existing products and to develop, introduce and commercialize
new products.
The markets for our products are characterized by rapidly
changing technology, evolving industry standards and new product
introductions, which may make our existing products obsolete.
Our future success will depend in part upon our ability to
enhance existing products and to develop and introduce new
products. We believe that we will need to continue to provide
new products that can detect and quantify a greater number of
organisms from a single sample. We also believe that we must
develop new assays that can be performed on automated instrument
platforms. The development of new instrument platforms, if any,
in turn may require the modification of existing assays for use
with the new instrument, and additional time-consuming and
costly regulatory approvals. For example, our failure to
successfully develop and commercialize our development-stage
Panther instrument system on a timely basis could have a
negative impact on our financial performance.
The development of new or enhanced products is a complex and
uncertain process requiring the accurate anticipation of
technological, market and medical practice trends, as well as
precise technological execution. In addition, the successful
development of new products will depend on the development of
new technologies. We may be required to undertake time-consuming
and costly development activities and to seek regulatory
approval for
40
these new products. We may experience difficulties that could
delay or prevent the successful development, introduction and
marketing of these new products. We have experienced delays in
receiving FDA clearance in the past. Regulatory clearance or
approval of any new products we may develop may not be granted
by the FDA or foreign regulatory authorities on a timely basis,
or at all, and these and other new products may not be
successfully commercialized. Failure to timely achieve
regulatory approval for our products and introduce products to
market could negatively impact our growth objectives and
financial performance.
In October 2006 and May 2007, the FDA granted marketing approval
for use of the Procleix Ultrio assay on eSAS and TIGRIS,
respectively, to screen donated blood, plasma, organs and tissue
for HIV-1 and HCV in individual blood donations or in pools of
up to 16 blood samples. In August 2008, the FDA approved the
Procleix Ultrio assay to also screen donated blood, plasma,
organs and tissues for HBV in individual blood donations or in
pools of up to 16 blood samples on eSAS and the TIGRIS system.
Since August 2008, existing customers have not transitioned from
the use of the Procleix HIV-1/HCV blood screening assay to the
use of the Procleix Ultrio assay at the levels we anticipated.
We believe this is attributable in part to the FDAs
current requirements for testing blood donations, which do not
currently mandate testing for HBV. Nevertheless, we believe
blood collection centers will continue to focus on improving the
safety of donated blood by adopting the most advanced blood
screening technologies available. If customers do not transition
to the use of the Procleix Ultrio assay at expected levels for
any of these or other reasons, our financial performance may be
adversely affected.
We
face intense competition, and our failure to compete effectively
could decrease our revenues and harm our profitability and
results of operations.
The clinical diagnostics industry is highly competitive.
Currently, the majority of diagnostic tests used by physicians
and other health care providers are performed by large
reference, public health and hospital laboratories. We expect
that these laboratories will compete vigorously to maintain
their dominance in the diagnostic testing market. In order to
achieve market acceptance of our products, we will be required
to demonstrate that our products provide accurate,
cost-effective and time saving alternatives to tests performed
by traditional laboratory procedures and products made by our
competitors.
In the markets for clinical diagnostic products, a number of
competitors, including Roche, Abbott, Becton Dickinson, Siemens
and bioMérieux, currently compete with us for product
sales, primarily on the basis of technology, quality,
reputation, accuracy, ease of use, price, reliability, the
timing of new product introductions and product line offerings.
Our existing competitors or new market entrants may be in better
position than we are to respond quickly to new or emerging
technologies, may be able to undertake more extensive marketing
campaigns, may adopt more aggressive pricing policies and may be
more successful in attracting potential customers, employees and
strategic partners. Many of our competitors have, and in the
future these and other competitors may have, significantly
greater financial, marketing, sales, manufacturing, distribution
and technological resources than we do. Moreover, these
companies may have substantially greater expertise in conducting
clinical trials and research and development, greater ability to
obtain necessary intellectual property licenses and greater
brand recognition than we do, any of which may adversely impact
our customer retention and market share.
Competitors may make rapid technological developments that may
result in our technologies and products becoming obsolete before
we recover the expenses incurred to develop them or before they
generate significant revenue or market acceptance. Some of our
competitors have developed real time or kinetic
nucleic acid assays and semi-automated instrument systems for
those assays. Additionally, some of our competitors are
developing assays that permit the quantitative detection of
multiple analytes (or quantitative multiplexing). Although we
are evaluating
and/or
developing such technologies, we believe some of our competitors
are further along in the development process than we are with
respect to such assays and instrumentation.
In the market for blood screening products, the primary
competitor to our collaboration with Novartis is Roche, which
received FDA approval of its PCR-based NAT tests for blood
screening in December 2002. Our collaboration with Novartis also
competes with blood banks and laboratories that have internally
developed assays based on PCR technology, Ortho Clinical
Diagnostics, a subsidiary of Johnson & Johnson, that
markets an HCV antigen assay, and
41
Abbott and Siemens with respect to immunoassay products. In the
future, our collaboration blood screening products also may
compete with viral inactivation or reduction technologies and
blood substitutes.
Novartis, with whom we have a collaboration agreement for blood
screening products, retains certain rights to grant licenses of
the patents related to HCV and HIV to third parties in blood
screening using NAT. Prior to its merger with Novartis, Chiron
granted HIV and HCV licenses to Roche in the blood screening and
clinical diagnostics fields. Chiron also granted HIV and HCV
licenses in the clinical diagnostics field to Bayer Healthcare
LLC (now Siemens), together with the right to grant certain
additional HIV and HCV sublicenses in the field to third
parties. We believe Bayers rights have now been assigned
to Siemens as part of Bayers December 2006 sale of its
diagnostics business. Chiron also granted an HCV license to
Abbott and an HIV license to Organon Teknika (now
bioMérieux) in the clinical diagnostics field. If Novartis
grants additional licenses in blood screening or Siemens grants
additional licenses in clinical diagnostics, further competition
will be created for sales of HCV and HIV assays and these
licenses could affect the prices that can be charged for our
products.
We
have collaboration agreements to develop NAT products for
industrial testing applications. We have limited experience
operating in these markets and may not successfully develop
commercially viable products.
We have collaboration agreements to develop NAT products for
detecting microorganisms in selected water applications, and for
microbiological and virus monitoring in the biotechnology and
pharmaceutical manufacturing industries. We have limited
experience applying our technologies and operating in industrial
testing markets. The process of successfully developing products
for application in these markets is expensive, time-consuming
and unpredictable. Research and development programs to create
new products require a substantial amount of our scientific,
technical, financial and human resources and there is no
guarantee that new products will be successfully developed. We
will need to design and execute specific product development
plans in conjunction with our collaborative partners and make
significant investments to ensure that any products we develop
perform properly, are cost-effective and adequately address
customer needs.
Even if we develop products for commercial use in these markets,
any products we develop may not be accepted in these markets,
may be subject to competition and may be subject to other risks
and uncertainties associated with these markets. For example,
most pharmaceutical manufacturers rely on culture testing of
their manufacturing systems, and may be unwilling to switch to
molecular testing like that used in our recently launched
MilliPROBE product to detect Pseudomonas aeruginosa. We
have no experience with customer and customer support
requirements, sales cycles, and other industry-specific
requirements or dynamics applicable to these new markets and we
and our collaborators may not be able to successfully convert
customers to tests using our NAT technologies, which we expect
will be more costly than existing methods. We will be reliant on
our collaborators in these markets. Our interests may be
different from those of our collaborators and conflicts may
arise in these collaboration arrangements that have an adverse
impact on our ability to develop new products. As a result of
these risks and other uncertainties, we may not be able to
successfully develop commercially viable products for
application in industrial testing or any other new markets.
Failure
to manufacture our products in accordance with product
specifications could result in increased costs, lost revenues,
customer dissatisfaction or voluntary product recalls, any of
which could harm our profitability and commercial
reputation.
Properly manufacturing our complex nucleic acid products
requires precise technological execution and strict compliance
with regulatory requirements. We may experience problems in the
manufacturing process for a number of reasons, such as equipment
malfunction or failure to follow specific protocols. If problems
arise during the production of a particular product lot, that
product lot may need to be discarded or destroyed. This could,
among other things, result in increased costs, lost revenues and
customer dissatisfaction. If problems are not discovered before
the product lot is released to the market, we may incur recall
and product liability costs. In the past, we have voluntarily
recalled certain product lots for failure to meet product
specifications. Any failure to manufacture our products in
accordance with product specifications could have a material
adverse effect on our revenues, profitability and commercial
reputation.
42
Disruptions
in the supply of raw materials and consumable goods or issues
associated with the quality thereof from our single source
suppliers, including Roche Molecular Biochemicals, which is an
affiliate of one of our primary competitors, could result in a
significant disruption in sales and profitability.
We purchase some key raw materials and consumable goods used in
the manufacture of our products from single-source suppliers. We
believe certain of our key suppliers may be experiencing
difficulties due to current economic conditions. If we cannot
obtain sufficient raw materials from our key suppliers,
production of our own products may be delayed or disrupted. In
addition, we may not be able to obtain supplies from replacement
suppliers on a timely or cost-effective basis, or at all. A
reduction or stoppage in supply while we seek a replacement
supplier would limit our ability to manufacture our products,
which could result in a significant reduction in sales and
profitability. For example, there is currently a worldwide
shortage of acetonitrile, which we use in the production of many
of our products. We believe this shortage results from decreased
worldwide production as demand falls for acetonitriles
co-product, acrylonitrile (a building block in the formulation
of resins used in cars, electronic housings, and small
appliances), largely attributed to the global economic slowdown.
As a result, our supply of acetonitrile has been restricted
along with many other companies worldwide. We are seeking to
implement mitigation measures to address supply shortages,
however, there can be no assurance that such measures will be
successful.
In addition, an impurity or variation from specification in any
raw material we receive could significantly delay our ability to
manufacture products. Our inventories may not be adequate to
meet our production needs during any prolonged interruption of
supply. We also have single source suppliers for proposed future
products. Failure to maintain existing supply relationships or
to obtain suppliers for our future products, if any, on
commercially reasonable terms would prevent us from
manufacturing our products and limit our growth.
Our current supplier of certain key raw materials for our
amplified NAT assays, pursuant to a fixed-price contract, is
Roche Molecular Biochemicals. We have a supply and purchase
agreement for oligonucleotides for HPV with Roche Molecular
Systems. Each of these entities is an affiliate of Roche
Diagnostics GmbH, one of our primary competitors. We currently
are involved in proceedings with Digene regarding our supply and
purchase agreement with Roche Molecular Systems. Digene has
filed a demand for binding arbitration against Roche that
challenges the validity of the supply and purchase agreement.
Digenes demand asserts, among other things, that Roche
materially breached a cross-license agreement between Roche and
Digene by granting us an improper sublicense and seeks a
determination that the supply and purchase agreement is null and
void. The arbitration hearing in this matter commenced
October 27, 2008 and the presentation of evidence concluded
November 10, 2008. In December 2008 and January 2009, the
parties filed post-hearing briefs and closing arguments were
presented on January 30, 2009. There can be no assurance
that these matters will be resolved in our favor.
We
have only one third-party manufacturer for each of our
instrument product lines, which exposes us to increased risks
associated with production delays, delivery schedules,
manufacturing capability, quality control, quality assurance and
costs.
We have one third-party manufacturer for each of our instrument
product lines. KMC Systems is the only manufacturer of our
TIGRIS instrument. MGM Instruments, Inc. is the only
manufacturer of our LEADER series of luminometers. We are
dependent on these third-party manufacturers, and this
dependence exposes us to increased risks associated with
production delays, delivery schedules, manufacturing capability,
quality control, quality assurance and costs. We have no firm
long-term commitments from KMC Systems, MGM Instruments or any
of our other manufacturers to supply products to us for any
specific period, or in any specific quantity, except as may be
provided in a particular purchase order. If KMC Systems, MGM
Instruments or any of our other third-party manufacturers
experiences delays, disruptions, capacity constraints or quality
control problems in its manufacturing operations or becomes
insolvent, then instrument shipments to our customers could be
delayed, which would decrease our revenues and harm our
competitive position and reputation. Further, because we place
orders with our manufacturers based on forecasts of expected
demand for our instruments, if we inaccurately forecast demand,
we may be unable to obtain adequate manufacturing capacity or
adequate quantities of components to meet our customers
delivery requirements, or we may accumulate excess inventories.
43
We may in the future need to find new contract manufacturers to
increase our volumes or to reduce our costs. We may not be able
to find contract manufacturers that meet our needs, and even if
we do, qualifying a new contract manufacturer and commencing
volume production is expensive and time consuming. For example,
we believe qualifying a new manufacturer of our TIGRIS
instrument would take approximately 12 months. If we are
required or elect to change contract manufacturers, we may lose
revenues and our customer relationships may suffer.
We and
our customers are subject to various governmental regulations,
and we may incur significant expenses to comply with, and
experience delays in our product commercialization as a result
of, these regulations.
The clinical diagnostic and blood screening products we design,
develop, manufacture and market are subject to rigorous
regulation by the FDA and numerous other federal, state and
foreign governmental authorities. We generally are prohibited
from marketing our clinical diagnostic products in the United
States unless we obtain either 510(k) clearance or premarket
approval from the FDA. Delays in receipt of, or failure to
obtain, clearances or approvals for future products could result
in delayed, or no, realization of product revenues from new
products or in substantial additional costs which could decrease
our profitability.
The process of seeking and obtaining regulatory approvals,
particularly from the FDA and some foreign governmental
authorities, to market our products can be costly and time
consuming, and approvals might not be granted for future
products on a timely basis, if at all. In March 2008, we started
U.S. clinical trials for our investigational APTIMA HPV
assay. We expect that trial enrollment of approximately 7,000
women and trial testing will take approximately two years.
However, actual trial enrollment may vary based on the
prevalence of cervical disease among women in the trial or other
factors. If we experience unexpected complications in conducting
the trial, we may incur additional costs or experience delays or
difficulties in receiving FDA approval. In addition, we cannot
guarantee that the FDA will ultimately approve the use of our
APTIMA HPV assay upon completion of the trial. Failure to obtain
FDA approval of our APTIMA HPV assay, or delays or difficulties
experienced during the clinical trial, could have a material
adverse effect on our financial performance.
We are also required to continue to comply with applicable FDA
and other regulatory requirements once we have obtained
clearance or approval for a product. These requirements include,
among other things, the Quality System Regulation, labeling
requirements, the FDAs general prohibition against
promoting products for unapproved or off-label uses
and adverse event reporting regulations. Failure to comply with
applicable FDA product regulatory requirements could result in,
among other things, warning letters, fines, injunctions, civil
penalties, repairs, replacements, refunds, recalls or seizures
of products, total or partial suspension of production, the
FDAs refusal to grant future premarket clearances or
approvals, withdrawals or suspensions of current product
applications and criminal prosecution. Any of these actions, in
combination or alone, could prevent us from selling our products
and harm our business.
We currently offer ASRs for use in the detection of PCA3 mRNA
and for use in the detection of the parasite Trichomonas
vaginalis. We also have developed an ASR for quantitative
HCV testing that Siemens provides to Quest Diagnostics. The FDA
restricts the sale of these products to clinical laboratories
certified under the Clinical Laboratory Improvement Amendments
of 1988, or CLIA, to perform high complexity testing and also
restricts the types of products that can be sold as ASRs. In
September 2007, the FDA published guidance for ASRs that define
the types of products that can be sold as ASRs. Under the terms
of this guidance and the ASR Manufacturer Letter
issued in June 2008 by the Office of In Vitro Diagnostic Device
Evaluation and Safety at the FDA, it may be more challenging for
us to market some of our ASR products and we may be required to
terminate those ASR product sales, conduct clinical studies and
make submissions of our ASR products to the FDA for clearance or
approval.
Outside the United States, our ability to market our products is
contingent upon maintaining our certification with the
International Organization for Standardization, and in some
cases receiving specific marketing authorization from the
appropriate foreign regulatory authorities. The requirements
governing the conduct of clinical trials, marketing
authorization, pricing and reimbursement vary widely from
country to country. Our EU foreign
44
marketing authorizations cover all member states. Foreign
registration is an ongoing process as we register additional
products
and/or
product modifications.
The use of our diagnostic products is also affected by CLIA, and
related federal and state regulations that provide for
regulation of laboratory testing. CLIA is intended to ensure the
quality and reliability of clinical laboratories in the United
States by mandating specific standards in the areas of personnel
qualifications, administration, participation in proficiency
testing, patient test management, quality and inspections.
Current or future CLIA requirements or the promulgation of
additional regulations affecting laboratory testing may prevent
some clinical laboratories from using some or all of our
diagnostic products.
Certain of the industrial testing products that we intend to
develop may be subject to government regulation, and market
acceptance may be subject to the receipt of certification from
independent agencies. We will be reliant on our industrial
collaborators in these markets to obtain any necessary
approvals. There can be no assurance that these approvals will
be received.
As both the FDA and foreign government regulators have become
increasingly stringent, we may be subject to more rigorous
regulation by governmental authorities in the future. Complying
with these rules and regulations could cause us to incur
significant additional expenses and delays in launching
products, which would harm our operating results.
Our
products are subject to recalls even after receiving FDA
approval or clearance.
The FDA and governmental bodies in other countries have the
authority to require the recall of our products if we fail to
comply with relevant regulations pertaining to product
manufacturing, quality, labeling, advertising, or promotional
activities, or if new information is obtained concerning the
safety of a product. Our assay products incorporate complex
biochemical reagents and our instruments comprise complex
hardware and software. We have in the past voluntarily recalled
products, which, in each case, required us to identify a problem
and correct it. In December 2008, we recalled certain AccuProbe
Group B Streptococcus Test kits and AccuProbe Mycobacterium
tuberculosis Culture Identification Test kits, after
receiving a customer complaint indicating the customer had
received a Group B Strep kit containing a probe reagent tube
that appeared upon visual inspection to be empty. We confirmed
that a manufacturing error had occurred, corrected the problem,
recalled all potentially affected products, provided
replacements and notified the FDA and other appropriate
authorities.
Although none of our past product recalls had a material adverse
effect on our business, our products may be subject to a future
government-mandated recall or a voluntary recall by us, and any
such recall could divert managerial and financial resources,
could be more difficult and costly to correct, could result in
the suspension of sales of our products and could harm our
financial results and our reputation.
Our
gross profit margin percentage on the sale of blood screening
assays will decrease upon the implementation of smaller pool
size testing.
We currently receive revenues from the sale of blood screening
assays primarily for use with pooled donor samples. In pooled
testing, multiple donor samples are initially screened by a
single test. Since Novartis sells blood screening assays under
our collaboration to blood collection centers on a per donation
basis, our profit margins are greater when a single test can be
used to screen multiple donor samples.
We believe certain blood screening markets are trending from
pooled testing of large numbers of donor samples to smaller pool
sizes. A greater number of tests will be required in markets
where smaller pool sizes are required. Under our recently
revised collaboration agreement with Novartis, we bear half of
the cost of manufacturing blood screening assays. The greater
number of tests required for smaller pool sizes will increase
our variable manufacturing costs, including costs of raw
materials and labor. If the price per donor or total sales
volume does not increase in line with the increase in our total
variable manufacturing costs, our gross profit margin percentage
from sales of blood screening assays will decrease upon adoption
of smaller pool sizes. We have already observed this trend with
respect to certain sales internationally. We are not able to
predict accurately the ultimate extent to which our gross profit
margin percentage will be negatively affected as a result of
smaller pool sizes,
45
because we do not know the ultimate selling price that Novartis
would charge to the end user or the degree to which smaller pool
size testing will be adopted across the markets in which our
products are sold.
Because
we depend on a small number of customers for a significant
portion of our total revenues, the loss of any of these
customers or any cancellation or delay of a large purchase by
any of these customers could significantly reduce our
revenues.
Historically, a limited number of customers has accounted for a
significant portion of our total revenues, and we do not have
any long-term commitments with these customers, other than our
collaboration agreement with Novartis. Revenues from our blood
screening collaboration with Novartis accounted for 48% of our
total revenues for 2008 and 45% of our total revenues for 2007.
Our blood screening collaboration with Novartis is largely
dependent on two large customers in the United States, The
American Red Cross and Americas Blood Centers, although we
did not receive any revenues directly from those entities.
Novartis was our only customer that accounted for greater than
10% of our total revenues for 2008. Various state and city
public health agencies accounted for an aggregate of 8% of our
total revenues for 2008 and 9% of total revenues for 2007.
Although state and city public health agencies are legally
independent of each other, we believe they tend to act similarly
with respect to their product purchasing decisions. We
anticipate that our operating results will continue to depend to
a significant extent upon revenues from a small number of
customers. The loss of any of our key customers, or a
significant reduction in sales volume or pricing to those
customers, could significantly reduce our revenues.
Intellectual
property rights on which we rely to protect the technologies
underlying our products may be inadequate to prevent third
parties from using our technologies or developing competing
products.
Our success will depend in part on our ability to obtain patent
protection for, or maintain the secrecy of, our proprietary
products, processes and other technologies for development of
blood screening and clinical diagnostic products and
instruments. Although we had more than 470 United States and
foreign patents covering our products and technologies as of
December 31, 2008, these patents, or any patents that we
may own or license in the future, may not afford meaningful
protection for our technology and products. The pursuit and
assertion of a patent right, particularly in areas like nucleic
acid diagnostics and biotechnology, involve complex
determinations and, therefore, are characterized by substantial
uncertainty. In addition, the laws governing patentability and
the scope of patent coverage continue to evolve, particularly in
biotechnology. As a result, patents might not issue from certain
of our patent applications or from applications licensed to us.
Our existing patents will expire by December 8, 2025 and
the patents we may obtain in the future also will expire over
time.
The scope of any of our issued patents may not be broad enough
to offer meaningful protection. In addition, others may
challenge our current patents or patents we may obtain in the
future and, as a result, these patents could be narrowed,
invalidated or rendered unenforceable, or we may be forced to
stop using the technology covered by these patents or to license
technology from third parties.
The laws of some foreign countries may not protect our
proprietary rights to the same extent as do the laws of the
United States. Any patents issued to us or our partners may not
provide us with any competitive advantages, and the patents held
by other parties may limit our freedom to conduct our business
or use our technologies. Our efforts to enforce and maintain our
intellectual property rights may not be successful and may
result in substantial costs and diversion of management time.
Even if our rights are valid, enforceable and broad in scope,
third parties may develop competing products based on technology
that is not covered by our patents.
In addition to patent protection, we also rely on copyright and
trademark protection, trade secrets, know-how, continued
technological innovation and licensing opportunities. In an
effort to maintain the confidentiality and ownership of our
trade secrets and proprietary information, we require our
employees, consultants, advisors and others to whom we disclose
confidential information to execute confidentiality and
proprietary information and inventions agreements. However, it
is possible that these agreements may be breached, invalidated
or rendered unenforceable, and if so, there may not be an
adequate corrective remedy available. Furthermore, like many
companies in our industry, we may from time to time hire
scientific personnel formerly employed by other companies
involved in one or more areas similar to the activities we
conduct. In some situations, our confidentiality and proprietary
information and inventions agreements may conflict with, or be
subject to, the rights of third parties
46
with whom our employees, consultants or advisors have prior
employment or consulting relationships. Although we require our
employees and consultants to maintain the confidentiality of all
confidential information of previous employers, we or these
individuals may be subject to allegations of trade secret
misappropriation or other similar claims as a result of their
prior affiliations. Finally, others may independently develop
substantially equivalent proprietary information and techniques,
or otherwise gain access to our trade secrets. Our failure to
protect our proprietary information and techniques may inhibit
or limit our ability to exclude certain competitors from the
market and execute our business strategies.
The
diagnostic products industry has a history of patent and other
intellectual property litigation, and we have been and may
continue to be involved in costly intellectual property
lawsuits.
The diagnostic products industry has a history of patent and
other intellectual property litigation, and these lawsuits
likely will continue. From time-to-time in the ordinary course
of business we receive communications from third parties calling
our attention to patents or other intellectual property rights
owned by them, with the implicit or explicit suggestion that we
may need to acquire a license of such rights. We have faced in
the past, and may face in the future, patent infringement
lawsuits by companies that control patents for products and
services similar to ours or other lawsuits alleging infringement
by us of their intellectual property rights. In order to protect
or enforce our intellectual property rights, we may have to
initiate legal proceedings against third parties. Legal
proceedings relating to intellectual property typically are
expensive, take significant time and divert managements
attention from other business concerns. The cost of this
litigation could adversely affect our results of operations,
making us less profitable. Further, if we do not prevail in an
infringement lawsuit brought against us, we might have to pay
substantial damages, including treble damages, and we could be
required to stop the infringing activity or obtain a license to
use the patented technology.
Recently, we have been involved in a number of patent-related
disputes with third parties. In December 2006, Digene
Corporation filed a demand for binding arbitration against Roche
with the International Centre for Dispute Resolution, or the
IDCR, of the American Arbitration Association in New York.
Digenes demand asserts, among other things, that Roche
materially breached a cross-license agreement between Roche and
Digene by granting us an improper sublicense and seeks a
determination that our supply and purchase agreement with Roche
is null and void. On July 13, 2007, the ICDR arbitrators
granted our petition to join the arbitration. On August 27,
2007, Digene filed an amended arbitration demand and asserted a
claim against us for tortious interference with the
cross-license agreement. The arbitration hearing commenced
October 27, 2008 and the presentation of evidence concluded
November 10, 2008. In December 2008 and January 2009 the
parties filed post-hearing briefs and closing arguments were
presented on January 30, 2009. There can be no assurance
that the matter will be resolved in our favor.
Pursuant to our June 1998 collaboration agreement with Novartis,
we hold certain rights in the blood screening and clinical
diagnostics fields under patents originally issued to Novartis
covering the detection of HIV. We sell a qualitative HIV test in
the clinical diagnostics field and we manufacture tests for HIV
for use in the blood screening field, which Novartis sells under
Novartis brands and name. In February 2005, the
U.S. Patent and Trademark Office declared two interferences
related to U.S. Patent No. 6,531,276 (Methods
For Detecting Human Immunodeficiency Virus Nucleic Acid),
originally issued to Novartis. The first interference was
between Novartis and the National Institutes of Health, or NIH,
and pertained to U.S. Patent Application
No. 06/693,866 (Cloning and Expression of HTLV-III
DNA). The second interference was between Novartis and
Institut Pasteur, and pertained to Institut Pasteurs
U.S. Patent Application No. 07/999,410 (Cloned
DNA Sequences, Hybridizable with Genomic RNA of
Lymphadenopathy-Associated Virus (LAV)). We are informed
that the Patent and Trademark Office determined that Institut
Pasteur invented the subject matter at issue prior to NIH and
Novartis. We are also informed that Novartis and NIH
subsequently filed actions in the United States District Court
for the District of Columbia challenging the decisions of the
Patent and Trademark Office in the patent interference cases.
From November 2007 through June 2008, the parties engaged in
settlement negotiations and then notified the court that they
had signed a memorandum of understanding prior to the
negotiation of final, definitive settlement documents. On
May 16, 2008, we signed a license agreement with Institut
Pasteur concerning Institut Pasteurs intellectual property
for the molecular detection of HIV, covering products
manufactured and sold through, and under, our brands or name. On
June 27, 2008, the parties to the pending litigation in the
United States District Court for the District of Columbia
47
informed the court that they were unable to reach a final,
definitive agreement and intended to proceed with litigation.
There can be no assurances as to the ultimate outcome of the
interference litigation and no assurances as to how the outcome
of the interference litigation may affect the patent rights
licensed from Institut Pasteur, or Novartis right to sell
the HIV blood screening tests.
We may
be subject to future product liability claims that may exceed
the scope and amount of our insurance coverage, which would
expose us to liability for uninsured claims.
While there is a federal preemption defense against product
liability claims for medical products that receive premarket
approval from the FDA, we believe that no such defense is
available for our products that we market under a 510(k)
clearance. As such, we are subject to potential product
liability claims as a result of the design, development,
manufacture and marketing of our clinical diagnostic products.
Any product liability claim brought against us, with or without
merit, could result in the increase of our product liability
insurance rates. In addition, our insurance policies have
various exclusions, and thus we may be subject to a product
liability claim for which we have no insurance coverage, in
which case, we may have to pay the entire amount of any award.
In addition, insurance varies in cost and can be difficult to
obtain, and we may not be able to obtain insurance in the future
on terms acceptable to us, or at all. A successful product
liability claim brought against us in excess of our insurance
coverage may require us to pay substantial amounts, which could
harm our business and results of operations.
We are
exposed to risks associated with acquisitions and other
long-lived and intangible assets that may become impaired and
result in an impairment charge.
As of December 31, 2008, we had approximately
$230.6 million of long-lived assets, including
$13.4 million of capitalized software, net of accumulated
amortization, relating to our TIGRIS instrument, goodwill of
$18.6 million, a $5.4 million investment in Qualigen,
Inc., and $51.2 million of capitalized license and
manufacturing access fees, patents, purchased intangibles and
other long term assets. Additionally, we had $74.3 million
of land and buildings, $16.5 million of building
improvements, and $51.2 million of equipment and furniture
and fixtures. The substantial majority of our long-lived assets
are located in the United States. The carrying amounts of
long-lived and intangible assets are affected whenever events or
changes in circumstances indicate that the carrying amount of
any asset may not be recoverable.
These events or changes might include a significant decline in
market share, a significant decline in profits, rapid changes in
technology, significant litigation, an inability to successfully
deliver an instrument to the marketplace and attain customer
acceptance or other matters. Adverse events or changes in
circumstances may affect the estimated undiscounted future
operating cash flows expected to be derived from long-lived and
intangible assets. If at any time we determine that an
impairment has occurred, we will be required to reflect the
impaired value as a charge, resulting in a reduction in earnings
in the quarter such impairment is identified and a corresponding
reduction in our net asset value. A material reduction in
earnings resulting from such a charge could cause us to fail to
be profitable in the period in which the charge is taken or
otherwise fail to meet the expectations of investors and
securities analysts, which could cause the price of our stock to
decline.
In June 2008, we recorded an impairment charge for the net
capitalized balance of $3.5 million under our license
agreement with Corixa. In the second quarter of 2008, a series
of events indicated that future alternative uses of the
capitalized intangible asset were unlikely and that
recoverability of the asset through future cash flows was not
considered likely enough to support continued capitalization.
These second quarter 2008 indicators of impairment included
decisions on our planned commercial approach for oncology
diagnostic products, the completion of a detailed review of the
intellectual property suite acquired from Corixa, including our
assessment of the proven clinical utility for a majority of the
related markers, and the potential for near term sublicense
income that could be generated from the intellectual property
acquired.
In the quarter ended September 30, 2008, we recorded a
$1.6 million other-than-temporary loss relating to our
investment in Qualigen. In making this determination, we
considered a number of factors, including, among others, the
share price from the companys latest financing round, the
performance of the company in relation to its own operating
targets and business plan, the companys revenue and cost
trends, the companys liquidity and cash position,
including its cash burn rate, market acceptance of the
companys products and services, new products
48
and/or
services that the company may have forthcoming, any significant
news specific to the company, the companys competitors and
industry, the outlook of the overall industry in which the
company operates and a third party valuation report.
Future
changes in financial accounting standards or practices, or
existing taxation rules or practices, may cause adverse
unexpected revenue or expense fluctuations and affect our
reported results of operations.
A change in accounting standards or practices, or a change in
existing taxation rules or practices, can have a significant
effect on our reported results and may even affect our reporting
of transactions completed before the change is effective. New
accounting pronouncements and taxation rules and varying
interpretations of accounting pronouncements and taxation
practice have occurred and may occur in the future. Changes to
existing rules or the questioning of current practices may
adversely affect our reported financial results or the way we
conduct our business. Our effective tax rate can also be
impacted by changes in estimates of prior years items,
past and future levels of research and development spending, the
outcome of audits by federal, state and foreign jurisdictions
and changes in overall levels of income before tax.
We
expect to continue to incur significant research and development
expenses, which may make it difficult for us to maintain
profitability.
In recent years, we have incurred significant costs in
connection with the development of blood screening and clinical
diagnostic products, as well as our TIGRIS and Panther
instrument systems. We expect our expense levels to remain high
in connection with our research and development as we seek to
continue to expand our product offerings and continue to develop
products and technologies in collaboration with our partners. As
a result, we will need to continue to generate significant
revenues to maintain profitability. Although we expect our
research and development expenses as a percentage of revenue to
decrease in future periods, we may not be able to generate
sufficient revenues to maintain profitability in the future. Our
failure to maintain profitability in the future could cause the
market price of our common stock to decline.
Our
short term investments are subject to market and investment
risks which may result in a loss of value.
We engage one or more third parties to manage some of our cash
consistent with an investment policy that restricts investments
to securities of high credit quality, with requirements placed
on maturities and concentration by security type and issue.
These investments are intended to preserve principal while
providing liquidity adequate to meet our projected cash
requirements. Risks of principal loss are intended to be
minimized through diversified short and medium term investments
of high quality, but these investments are not, in every case,
guaranteed or fully insured. In light of recent changes in the
credit market, some high quality short term investment
securities, similar to the types of securities that we invest
in, have suffered illiquidity, events of default or
deterioration in credit quality. If our short term investment
portfolio becomes affected by any of the foregoing or other
adverse events, we may incur losses relating to these
investments.
We may
not have financing for future capital requirements, which may
prevent us from addressing gaps in our product offerings or
improving our technology.
Although historically our cash flow from operations has been
sufficient to satisfy working capital, capital expenditure and
research and development requirements, we may in the future need
to incur debt or issue equity in order to fund these
requirements, as well as to make acquisitions and other
investments. If we cannot obtain debt or equity financing on
acceptable terms or are limited with respect to incurring debt
or issuing equity, including as a result of current economic
conditions, we may be unable to address gaps in our product
offerings or improve our technology, particularly through
acquisitions or investments.
If we raise funds through the issuance of debt or equity, any
debt securities or preferred stock issued will have rights,
preferences and privileges senior to those of holders of our
common stock in the event of a liquidation and may contain other
provisions that adversely affect the rights of the holders of
our common stock. The terms of any
49
debt securities may impose restrictions on our operations. If we
raise funds through the issuance of equity or debt convertible
into equity, this issuance would result in dilution to our
stockholders.
If we
or our contract manufacturers are unable to manufacture our
products in sufficient quantities, on a timely basis, at
acceptable costs and in compliance with regulatory requirements,
our ability to sell our products will be harmed.
Our products must be manufactured in sufficient quantities and
on a timely basis, while maintaining product quality and
acceptable manufacturing costs and complying with regulatory
requirements. In determining the required quantities of our
products and the manufacturing schedule, we must make
significant judgments and estimates based on historical
experience, inventory levels, current market trends and other
related factors. Because of the inherent nature of estimates,
there could be significant differences between our estimates and
the actual amounts of products we and our distributors require,
which could harm our business and results of operations.
Significant additional work will be required for
scaling-up
manufacturing of each new product prior to commercialization,
and we may not successfully complete this work. Manufacturing
and quality control problems have arisen and may arise in the
future as we attempt to
scale-up our
manufacturing of a new product, and we may not achieve
scale-up in
a timely manner or at a commercially reasonable cost, or at all.
In addition, although we expect some of our newer products and
products under development to share production attributes with
our existing products, production of these newer products may
require the development of new manufacturing technologies and
expertise. We may be unable to develop the required technologies
or expertise.
The amplified NAT tests that we produce are significantly more
expensive to manufacture than our
non-amplified
products. As we continue to develop new amplified NAT tests in
response to market demands for greater sensitivity, our product
costs will increase significantly and our margins may decline.
We sell our products in a number of cost-sensitive market
segments, and we may not be able to manufacture these more
complex amplified tests at costs that would allow us to maintain
our historical gross margin percentages. In addition, new
products that detect or quantify more than one target organism
will contain significantly more complex reagents, which will
increase the cost of our manufacturing processes and quality
control testing. We or other parties we engage to help us may
not be able to manufacture these products at a cost or in
quantities that would make these products commercially viable.
If we are unable to develop or contract for manufacturing
capabilities on acceptable terms for our products under
development, we will not be able to conduct pre-clinical,
clinical and validation testing on these product candidates,
which will prevent or delay regulatory clearance or approval of
these product candidates.
Blood screening and clinical diagnostic products are regulated
by the FDA as well as other foreign medical regulatory bodies.
In some cases, such as in the United States and the European
Union, certain products may also require individual lot release
testing. Maintaining compliance with multiple regulators, and
multiple centers within the FDA, adds complexity and cost to our
overall manufacturing processes. In addition, our manufacturing
facilities and those of our contract manufacturers are subject
to periodic regulatory inspections by the FDA and other federal
and state regulatory agencies, and these facilities are subject
to Quality System Regulations requirements of the FDA. We or our
contractors may fail to satisfy these regulatory requirements in
the future, and any failure to do so may prevent us from selling
our products.
Our
sales to international markets are subject to additional
risks.
Sales of our products outside the United States accounted for
23% of our total revenues for 2008 and 20% of our total revenues
for 2007. Sales by Novartis of collaboration blood screening
products outside of the United States accounted for 78% of our
international revenues in 2008 and 77% in 2007. Novartis has
responsibility for the international distribution of
collaboration blood screening products.
We encounter risks inherent in international operations. We
expect a significant portion of our sales growth, especially
with respect to blood screening products, to come from expansion
in international markets. If the value of
50
the United States dollar increases relative to foreign
currencies, our products could become less competitive in
international markets. Our international sales also may be
limited or disrupted by:
|
|
|
|
|
the imposition of government controls;
|
|
|
|
export license requirements;
|
|
|
|
economic and political instability;
|
|
|
|
price controls;
|
|
|
|
trade restrictions and tariffs;
|
|
|
|
differing local product preferences and product
requirements; and
|
|
|
|
changes in foreign medical reimbursement and coverage policies
and programs.
|
In addition, we anticipate that requirements for smaller pool
sizes of blood samples will result in lower gross margin
percentages, as additional tests are required to deliver the
sample results. We have already observed this trend with respect
to certain sales in Europe. In general, international pool sizes
are smaller than domestic pool sizes and, therefore, growth in
blood screening revenues attributed to international expansion
has led and will lead to lower gross margin percentages.
If
third-party payors do not reimburse our customers for the use of
our clinical diagnostic products or if they reduce reimbursement
levels, our ability to sell our products will be
harmed.
We sell our clinical diagnostic products primarily to large
reference laboratories, public health institutions and
hospitals, substantially all of which receive reimbursement for
the health care services they provide to their patients from
third-party payors, such as Medicare, Medicaid and other
government programs, private insurance plans and managed care
programs. Most of these third-party payors may deny
reimbursement if they determine that a medical product was not
used in accordance with cost-effective treatment methods, as
determined by the third-party payor, or was used for an
unapproved indication. Third-party payors may also refuse to
reimburse for experimental procedures and devices.
Third-party payors reimbursement policies may affect sales
of our products that screen for more than one pathogen at the
same time, such as our APTIMA Combo 2 product for screening for
the causative agents of chlamydial infections and gonorrhea in
the same sample. Third-party payors may choose to reimburse our
customers on a per test basis, rather than on the basis of the
number of results given by the test. This may result in
reference laboratories, public health institutions and hospitals
electing to use separate tests to screen for each disease so
that they can receive reimbursement for each test they conduct.
In that event, these entities likely would purchase separate
tests for each disease, rather than products that test for more
than one microorganism.
In addition, third-party payors are increasingly attempting to
contain health care costs by limiting both coverage and the
level of reimbursement for medical products and services. Levels
of reimbursement may decrease in the future, and future
legislation, regulation or reimbursement policies of third-party
payors may adversely affect the demand for and price levels of
our products. If our customers are not reimbursed for our
products, they may reduce or discontinue purchases of our
products, which would cause our revenues to decline.
We are
dependent on technologies we license, and if we fail to maintain
our licenses or license new technologies and rights to
particular nucleic acid sequences for targeted diseases in the
future, we may be limited in our ability to develop new
products.
We are dependent on licenses from third parties for some of our
key technologies. For example, our patented
Transcription-Mediated Amplification technology is based on
technology we have licensed from Stanford University. We enter
into new licensing arrangements in the ordinary course of
business to expand our product portfolio and access new
technologies to enhance our products and develop new products.
Many of these licenses provide us with exclusive rights to the
subject technology or disease marker. If our license with
respect to any of these technologies or markers is terminated
for any reason, we may not be able to sell products that
incorporate the technology. In addition, we may lose competitive
advantages if we fail to maintain exclusivity under an exclusive
51
license. DiagnoCure, from whom we have an exclusive license to
the PCA3 gene marker for prostate cancer, has asserted that we
may have lost market exclusivity because of a failure to meet a
milestone under our license and collaboration agreement. We
disagree with DiagnoCures assertion and discussions are
ongoing with DiagnoCure on the issue, but we can give no
assurance that this matter will be resolved in our favor.
Our ability to develop additional diagnostic tests for diseases
may depend on the ability of third parties to discover
particular sequences or markers and correlate them with disease,
as well as the rate at which such discoveries are made. Our
ability to design products that target these diseases may depend
on our ability to obtain the necessary rights from the third
parties that make any of these discoveries. In addition, there
are a finite number of diseases and conditions for which our NAT
assays may be economically viable. If we are unable to access
new technologies or the rights to particular sequences or
markers necessary for additional diagnostic products on
commercially reasonable terms, we may be limited in our ability
to develop new diagnostic products.
Our products and manufacturing processes require access to
technologies and materials that may be subject to patents or
other intellectual property rights held by third parties. We may
discover that we need to obtain additional intellectual property
rights in order to commercialize our products. We may be unable
to obtain such rights on commercially reasonable terms or at
all, which could adversely affect our ability to grow our
business.
If we
fail to attract, hire and retain qualified personnel, we may not
be able to design, develop, market or sell our products or
successfully manage our business.
Competition for top management personnel is intense and we may
not be able to recruit and retain the personnel we need. The
loss of any one of our management personnel or our inability to
identify, attract, retain and integrate additional qualified
management personnel could make it difficult for us to manage
our business successfully, attract new customers, retain
existing customers and pursue our strategic objectives. Although
we have employment agreements with our executive officers, we
may be unable to retain our existing management. We do not
maintain key person life insurance for any of our executive
officers.
Competition for skilled sales, marketing, research, product
development, engineering, and technical personnel is intense and
we may not be able to recruit and retain the personnel we need.
The loss of the services of key personnel, or our inability to
hire new personnel with the requisite skills, could restrict our
ability to develop new products or enhance existing products in
a timely manner, sell products to our customers or manage our
business effectively.
If a
natural or man-made disaster strikes our manufacturing
facilities, we will be unable to manufacture our products for a
substantial amount of time and our sales will
decline.
We manufacture substantially all of our products in our two
manufacturing facilities located in San Diego, California.
These facilities and the manufacturing equipment we use would be
costly to replace and could require substantial lead time to
repair or replace. Our facilities may be harmed by natural or
man-made disasters, including, without limitation, earthquakes
and fires, and in the event they are affected by a disaster, we
would be forced to rely on third-party manufacturers. The
wildfires in San Diego in October 2007 required that we
temporarily shut down our facility for the manufacture of blood
screening products. In the event of a disaster, we may lose
customers and we may be unable to regain those customers
thereafter. Although we possess insurance for damage to our
property and the disruption of our business from casualties,
this insurance may not be sufficient to cover all of our
potential losses and may not continue to be available to us on
acceptable terms, or at all.
If we
use biological and hazardous materials in a manner that causes
injury or violates laws, we may be liable for
damages.
Our research and development activities and our manufacturing
activities involve the controlled use of infectious diseases,
potentially harmful biological materials, as well as hazardous
materials, chemicals and various radioactive compounds. We
cannot completely eliminate the risk of accidental contamination
or injury, and we could be held liable for damages that result
from any contamination or injury. In addition, we are subject to
federal, state and local laws and regulations governing the use,
storage, handling and disposal of these materials and
52
specified waste products. The damages resulting from any
accidental contamination and the cost of compliance with
environmental laws and regulations could be significant.
The
anti-takeover provisions of our certificate of incorporation and
by-laws, and provisions of Delaware law, could delay or prevent
a change of control that our stockholders may
favor.
Provisions of our amended and restated certificate of
incorporation and amended and restated bylaws may discourage,
delay or prevent a merger or other change of control that our
stockholders may consider favorable or may impede the ability of
the holders of our common stock to change our management. The
provisions of our amended and restated certificate of
incorporation and amended and restated bylaws, among other
things:
|
|
|
|
|
divide our board of directors into three classes, with members
of each class to be elected for staggered
three-year
terms;
|
|
|
|
limit the right of stockholders to remove directors;
|
|
|
|
regulate how stockholders may present proposals or nominate
directors for election at annual meetings of
stockholders; and
|
|
|
|
authorize our board of directors to issue preferred stock in one
or more series, without stockholder approval.
|
In addition, because we have not chosen to be exempt from
Section 203 of the Delaware General Corporation Law, this
provision could also delay or prevent a change of control that
our stockholders may favor. Section 203 provides that,
subject to limited exceptions, persons that acquire, or are
affiliated with a person that acquires, more than
15 percent of the outstanding voting stock of a Delaware
corporation shall not engage in any business combination with
that corporation, including by merger, consolidation or
acquisitions of additional shares, for a three-year period
following the date on which that person or its affiliate crosses
the 15 percent stock ownership threshold.
If we
do not effectively manage our growth, it could affect our
ability to pursue opportunities and expand our
business.
Growth in our business has placed and may continue to place a
significant strain on our personnel, facilities, management
systems and resources. We will need to continue to improve our
operational and financial systems and managerial controls and
procedures and train and manage our workforce. We will have to
maintain close coordination among our various departments. If we
fail to effectively manage our growth, it could adversely affect
our ability to pursue business opportunities and expand our
business.
Information
technology systems implementation issues could disrupt our
internal operations and adversely affect our financial
results.
Portions of our information technology infrastructure may
experience interruptions, delays or cessations of service or
produce errors in connection with ongoing systems implementation
work. In particular, we implemented a new enterprise resource
planning software system to replace our various legacy systems.
To more fully realize the potential of this system, we are
continually reassessing and upgrading processes and this may be
more expensive, time consuming and resource intensive than
planned. Any disruptions that may occur in the operation of this
system or any future systems could increase our expenses and
adversely affect our ability to report in an accurate and timely
manner the results of our consolidated operations, our financial
position and cash flow and to otherwise operate our business,
which could adversely affect our financial results, stock price
and reputation.
Our
forecasts and other forward looking statements are based upon
various assumptions that are subject to significant
uncertainties that may result in our failure to achieve our
forecasted results.
From time to time in press releases, conference calls and
otherwise, we may publish or make forecasts or other forward
looking statements regarding our future results, including
estimated earnings per share and other operating and financial
metrics. Our forecasts are based upon various assumptions that
are subject to significant uncertainties and any number of them
may prove incorrect. For example, our revenue forecasts are
based in large part on data and
53
estimates we receive from our collaboration partners and
distributors. Our achievement of any forecasts depends upon
numerous factors, many of which are beyond our control.
Consequently, our performance may not be consistent with
management forecasts. Variations from forecasts and other
forward looking statements may be material and could adversely
affect our stock price and reputation.
Compliance
with changing corporate governance and public disclosure
regulations may result in additional expenses.
Changing laws, regulations and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley
Act of 2002, new SEC regulations and Nasdaq Global Select Market
rules, are creating uncertainty for companies such as ours. To
maintain high standards of corporate governance and public
disclosure, we have invested, and intend to invest, in all
reasonably necessary resources to comply with evolving
standards. These investments have resulted in increased general
and administrative expenses and a diversion of management time
and attention from revenue-generating activities and may
continue to do so in the future.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
Our worldwide headquarters are located in our two adjacent
facilities located on Genetic Center Drive in San Diego,
California. We own each of the facilities and the underlying
land. The first facility is 262,000 square feet. The second
facility consists of a 292,000 square foot shell, with
approximately 214,000 square feet built-out with interior
improvements in the first phase. The remaining expansion space
can be used to accommodate future growth. Construction costs as
of December 31, 2008 were approximately $46.3 million
for this facility. These costs were capitalized as incurred and
depreciation commenced upon our move-in during May 2006. Our
subsidiary Molecular Light Technology Limited owns a
23,000 square-foot facility in Cardiff, United Kingdom.
In February 2008, we completed the purchase of the facility
where we manufacture our blood screening products. We had
previously leased this facility, which consists of
93,646 square feet, located in San Diego, California,
since November 1997. The purchase price was $15.7 million.
We also lease the following facility:
Leased
Facility
|
|
|
|
|
|
|
Location
|
|
|
Size
|
|
|
Term of Lease
|
Rehco Facility
San Diego, California
|
|
|
6,438 square feet
|
|
|
Lease currently set to expire in August 2009 with no renewal
options.
|
|
|
|
|
|
|
|
|
|
Item 3.
|
Legal
Proceedings
|
We are a party to the following litigation and are currently
participating in other litigation in the ordinary course of
business. We intend to vigorously defend our interests in these
matters. We expect that the resolution of these matters will not
have a material adverse effect on our business, financial
condition or results of operations. However, due to the
uncertainties inherent in litigation, no assurance can be given
as to the outcome of these proceedings.
Digene
Corporation
In December 2006, Digene Corporation, or Digene, filed a demand
for binding arbitration against F. Hoffman-La Roche Ltd.
and Roche Molecular Systems, Inc., collectively referred to as
Roche, with the International Centre for Dispute Resolution of
the American Arbitration Association in New York, or ICDR.
Digenes arbitration demand challenges the validity of the
February 2005 supply and purchase agreement between us and
Roche. Under the supply and purchase agreement, Roche
manufactures and supplies us with human papillomavirus, or HPV,
54
oligonucleotide products. Digenes demand asserts, among
other things, that Roche materially breached a cross-license
agreement between Roche and Digene by granting us an improper
sublicense and seeks a determination that the supply and
purchase agreement is null and void.
On July 13, 2007, the ICDR arbitrators granted our petition
to join the arbitration. On August 27, 2007, Digene filed
an amended arbitration demand and asserted a claim against us
for tortious interference with the cross-license agreement. The
arbitration hearing in this matter commenced October 27,
2008 and the presentation of evidence concluded
November 10, 2008. In December 2008 and January 2009, the
parties filed post-hearing briefs and closing arguments were
presented on January 30, 2009.
We believe that the supply and purchase agreement is valid and
that our purchases of HPV oligonucleotide products under the
supply and purchase agreement are and will be in accordance with
applicable law. However, there can be no assurance that the
matter will be resolved in our favor.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of security holders during
the quarter ended December 31, 2008.
55
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
Information
Our common stock has been traded on The Nasdaq Global Select
Market since September 16, 2002 under the symbol GPRO.
Prior to that time, there was no public market for our common
stock. The following table sets forth the high and low sale
prices for our common stock as reported on The Nasdaq Global
Select Market for the periods indicated:
|
|
|
|
|
|
|
|
|
2007
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
52.86
|
|
|
$
|
46.22
|
|
Second Quarter
|
|
$
|
60.50
|
|
|
$
|
46.61
|
|
Third Quarter
|
|
$
|
67.67
|
|
|
$
|
57.92
|
|
Fourth Quarter
|
|
$
|
71.84
|
|
|
$
|
60.81
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
64.68
|
|
|
$
|
44.82
|
|
Second Quarter
|
|
$
|
58.71
|
|
|
$
|
46.84
|
|
Third Quarter
|
|
$
|
62.39
|
|
|
$
|
46.58
|
|
Fourth Quarter
|
|
$
|
54.86
|
|
|
$
|
30.01
|
|
As of February 13, 2009, there were 7,084 stockholders of
record of our common stock. We have not paid any cash dividends
to date and do not anticipate any being paid in the foreseeable
future.
Issuer
Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Dollar Value
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
|
of Shares
|
|
|
|
|
|
|
|
|
|
Part of
|
|
|
that May Yet
|
|
|
|
Total
|
|
|
|
|
|
Publicly
|
|
|
Be Purchased
|
|
|
|
Number
|
|
|
Average
|
|
|
Announced
|
|
|
Under the
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Plans or
|
|
|
Plans or
|
|
|
|
Purchased
|
|
|
Per Share
|
|
|
Programs
|
|
|
Programs
|
|
|
October 1-31, 2008 Repurchase
Program(1)
|
|
|
518,100
|
|
|
$
|
48.22
|
|
|
|
518,100
|
|
|
$
|
215,000,000
|
|
October 1-31, 2008 Employee
Transactions(2)
|
|
|
937
|
|
|
|
44.32
|
|
|
|
|
|
|
|
|
|
November 1-30, 2008 Repurchase
Program(1)
|
|
|
1,007,200
|
|
|
|
39.71
|
|
|
|
1,007,200
|
|
|
|
175,000,000
|
|
November 1-30, 2008 Employee
Transactions(2)
|
|
|
3,655
|
|
|
|
46.89
|
|
|
|
|
|
|
|
|
|
December 1-31, 2008 Repurchase
Program(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,000,000
|
|
December 1-31, 2008 Employee
Transactions(2)
|
|
|
82
|
|
|
|
37.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase Program
Total(1)
|
|
|
1,525,300
|
|
|
|
42.60
|
|
|
|
1,525,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Transactions
Total(2)
|
|
|
4,674
|
|
|
$
|
46.20
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In August 2008, our Board of Directors authorized the repurchase
of up to $250.0 million of our common stock over the two
years following adoption of the program, through negotiated or
open market transactions. There is no minimum or maximum number
of shares to be repurchased under the program. |
|
(2) |
|
During the fourth quarter of 2008, we repurchased and retired
4,674 shares of our common stock, at an average price of
$46.20, withheld by us to satisfy employee tax obligations upon
vesting of restricted stock granted under our 2003 Incentive
Award Plan. We may make similar repurchases in the future to
satisfy employee tax obligations upon vesting of restricted
stock. As of December 31, 2008, we had an aggregate of
251,731 shares of restricted stock and 80,000 shares
of Deferred Issuance Restricted Stock Awards outstanding. |
56
|
|
Item 6.
|
Selected
Financial Data
|
SELECTED
FINANCIAL INFORMATION
The selected financial data set forth below with respect to our
consolidated statements of income for each of the three years in
the period ended December 31, 2008 and, with respect to our
consolidated balance sheets, at December 31, 2008 and 2007
are derived from our consolidated financial statements that have
been audited by Ernst & Young LLP, independent
registered public accounting firm, which are included elsewhere
in this report. The statement of income data for the years ended
December 31, 2005 and 2004 and the balance sheet data as of
December 31, 2006, 2005, and 2004 are derived from our
audited consolidated financial statements that are not included
in this report. The selected financial information set forth
below should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and
related notes appearing elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
|
Statement of income data for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
429,220
|
|
|
$
|
370,877
|
|
|
$
|
325,307
|
|
|
$
|
271,650
|
|
|
$
|
222,560
|
|
Collaborative research revenue
|
|
|
20,581
|
|
|
|
16,619
|
|
|
|
15,937
|
|
|
|
25,843
|
|
|
|
27,122
|
|
Royalty and license revenue
|
|
|
22,894
|
|
|
|
15,518
|
|
|
|
13,520
|
|
|
|
8,472
|
|
|
|
20,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
472,695
|
|
|
|
403,014
|
|
|
|
354,764
|
|
|
|
305,965
|
|
|
|
269,707
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
128,029
|
|
|
|
119,641
|
|
|
|
103,882
|
|
|
|
83,900
|
|
|
|
59,908
|
|
Research and development
|
|
|
101,099
|
|
|
|
97,144
|
|
|
|
84,545
|
|
|
|
71,846
|
|
|
|
68,482
|
|
Marketing and sales
|
|
|
45,850
|
|
|
|
39,928
|
|
|
|
37,096
|
|
|
|
31,145
|
|
|
|
27,191
|
|
General and administrative
|
|
|
52,322
|
|
|
|
47,007
|
|
|
|
44,936
|
|
|
|
32,107
|
|
|
|
31,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
327,300
|
|
|
|
303,720
|
|
|
|
270,459
|
|
|
|
218,998
|
|
|
|
187,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
145,395
|
|
|
|
99,294
|
|
|
|
84,305
|
|
|
|
86,967
|
|
|
|
82,498
|
|
Net
income(1)
|
|
$
|
106,954
|
|
|
$
|
86,140
|
|
|
$
|
59,498
|
|
|
$
|
60,089
|
|
|
$
|
54,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.99
|
|
|
$
|
1.63
|
|
|
$
|
1.15
|
|
|
$
|
1.19
|
|
|
$
|
1.10
|
|
Diluted
|
|
$
|
1.95
|
|
|
$
|
1.58
|
|
|
$
|
1.12
|
|
|
$
|
1.15
|
|
|
$
|
1.06
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
53,708
|
|
|
|
52,975
|
|
|
|
51,538
|
|
|
|
50,617
|
|
|
|
49,429
|
|
Diluted
|
|
|
54,796
|
|
|
|
54,522
|
|
|
|
53,101
|
|
|
|
52,445
|
|
|
|
51,403
|
|
Balance sheet data as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
505,178
|
|
|
$
|
433,494
|
|
|
$
|
289,913
|
|
|
$
|
220,288
|
|
|
$
|
193,826
|
|
Working capital
|
|
|
580,237
|
|
|
|
518,408
|
|
|
|
342,062
|
|
|
|
262,375
|
|
|
|
234,202
|
|
Total assets
|
|
|
869,531
|
|
|
|
789,053
|
|
|
|
623,839
|
|
|
|
510,236
|
|
|
|
411,082
|
|
Stockholders
equity(2)(3)
|
|
|
813,760
|
|
|
|
738,040
|
|
|
|
570,208
|
|
|
|
447,373
|
|
|
|
361,029
|
|
|
|
|
(1) |
|
We adopted Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment, on
January 1, 2006. For 2005 and 2004, net income including
pro forma stock-based compensation expense was
$45.3 million ($0.86 per diluted share) and
$41.9 million ($0.82 per diluted share), respectively. |
|
(2) |
|
Effective January 1, 2006, we adopted Staff Accounting
Bulletin No. 108, Considering the Effects of
Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements, which resulted in an
increase to beginning retained earnings of $3.9 million. |
|
(3) |
|
Effective January 1, 2007, we adopted Financial Accounting
Standards Board Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, which resulted in a reduction
in beginning retained earnings of approximately
$1.0 million. |
57
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
This report contains forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995, which provides a safe harbor for these
types of statements. To the extent statements in this report
involve, without limitation, our expectations for growth,
estimates of future revenue, expenses, profit, cash flow,
balance sheet items or any other guidance on future periods,
these statements are forward-looking statements. Forward-looking
statements can be identified by the use of forward-looking words
such as believes, expects,
hopes, may, will,
plans, intends, estimates,
could, should, would,
continue, seeks, or
anticipates, or other similar words, including their
use in the negative. Forward-looking statements are not
guarantees of performance. They involve known and unknown risks,
uncertainties and assumptions that may cause actual results,
levels of activity, performance or achievements to differ
materially from any results, level of activity, performance or
achievements expressed or implied by any forward-looking
statement. These risks and uncertainties include those under the
caption Item 1A Risk Factors. We
assume no obligation to update any forward-looking statements.
The audited consolidated financial statements and this
Managements Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with the
Consolidated Financial Statements and Notes thereto for the
years ended December 31, 2008, 2007 and 2006, included
elsewhere in this Annual Report on
Form 10-K.
Overview
We are a global leader in the development, manufacture and
marketing of rapid, accurate and cost-effective nucleic acid
probe-based products used for the clinical diagnosis of human
diseases and for screening donated human blood. We also develop
and manufacture nucleic acid probe-based products for the
detection of harmful organisms in the environment and in
industrial processes. We have 26 years of research and
development experience in nucleic acid detection, and our
products, which are based on our patented nucleic acid testing,
or NAT, technology, are used daily in clinical laboratories and
blood collection centers throughout the world.
We have achieved strong growth since 2002 in both revenues and
earnings, primarily due to the success of our clinical
diagnostic products for sexually transmitted diseases, or STDs,
and blood screening products that are used to detect the
presence of human immunodeficiency virus (type 1), or HIV-1,
hepatitis C virus, or HCV, hepatitis B virus, or HBV, and
West Nile Virus, or WNV. Under our collaboration agreement with
Novartis Vaccines and Diagnostics, Inc., or Novartis, formerly
known as Chiron Corporation, or Chiron, we manufacture blood
screening products, while Novartis is responsible for marketing,
sales and service of those products, which Novartis sells under
its trademarks.
Recent
Events
Financial
Results
Product sales for 2008 were $429.2 million, compared to
$370.9 million in 2007, an increase of 16%. Total revenues
for 2008 were $472.7 million, compared to
$403.0 million in 2007, an increase of 17%. Net income for
2008 was $107.0 million ($1.95 per diluted share), compared
to $86.1 million ($1.58 per diluted share) in 2007, an
increase of 24%.
Offer
to Acquire Tepnel Life Sciences
In January 2009, we made a recommended cash offer to acquire
Tepnel Life Sciences Plc, or Tepnel, a company registered in
England and Wales, for approximately $132.2 million (based
on the exchange rate described in the offer). Our offer is
subject to certain conditions, including approval of the offer
by a majority in number representing 75% or more in value of
Tepnels shareholders entitled to vote with respect to the
proposed transaction. If we are successful in our acquisition of
Tepnel, we believe the acquisition will provide us access to
growth opportunities in transplant diagnostics, genetic testing
and pharmaceutical services, as well as accelerate our ongoing
strategic efforts to strengthen our marketing and sales,
distribution and manufacturing capabilities in the European
molecular diagnostics market.
58
Stock
Repurchase Program
In August 2008, our Board of Directors authorized the repurchase
of up to $250.0 million of our common stock over the two
years following adoption of the program, through negotiated or
open market transactions. There is no minimum or maximum number
of shares to be repurchased under the program. During 2008, we
repurchased and retired approximately 1,705,400 shares
under this program at an average price of $43.96, or
approximately $75.0 million in total.
Voluntary
Counterbid to Acquire Innogenetics
In June 2008, following a bid by Solvay Pharmaceuticals, we
launched a conditional counterbid to acquire 100% of the
outstanding shares, warrants and convertible bonds of
Innogenetics NV, a Belgian molecular diagnostics company, for
approximately 215 million. On July 9, 2008,
Solvay Pharmaceuticals submitted a higher bid to acquire
Innogenetics and we formally withdrew our counterbid. Included
in our general and administrative expenses for 2008 are
approximately $2.0 million of costs associated with our
counterbid to acquire Innogenetics.
Corporate
Collaborations
Novartis
In January 2009, we entered into an agreement, referred to
herein as Amendment No. 11, with Novartis to amend the
June 11, 1998 collaboration agreement, or the 1998
Agreement, between the parties. The effective date of Amendment
No. 11 is January 1, 2009. Amendment No. 11
extends to June 30, 2025 the term of our blood screening
collaboration with Novartis under the 1998 Agreement. The 1998
Agreement was scheduled to expire by its terms in 2013.
The 1998 Agreement provided that we were solely responsible for
manufacturing costs incurred in connection with the
collaboration, while Novartis was responsible for sales and
marketing expenses associated with the collaboration. Amendment
No. 11 provides that, effective January 1, 2009, we
will recover 50% of our costs of goods sold incurred in
connection with the collaboration. In addition, we will receive
a percentage of the blood screening assay revenue generated
under the collaboration, as described in the next paragraph.
The 1998 Agreement provided that we share revenue from the sale
of blood screening assays under the collaboration with Novartis.
Under the terms of the 1998 Agreement, as previously amended,
our share of revenue from any assay that included a test for HCV
was 45.75%. Amendment No. 11 modifies our share of such
revenues, initially reducing it to 44% in 2009. Our share of
blood screening assay revenue increases in subsequent years as
follows:
2010-2011,
46%;
2012-2013,
47%; 2014, 48%; and 2015, 50%. Our share of blood screening
assay revenue is fixed at 50% from January 1, 2015 though
the remainder of the amended term of the agreement. Under
Amendment No. 11, our share of blood screening assay
revenue from any assay that does not test for HCV remains at
50%. As discussed above, we are entitled to our designated
percentage of revenue from the sale of blood screening assays as
well as the recovery of 50% of our costs of goods sold.
Amendment No. 11 also provides that Novartis will reduce
the amount of time between product sales and payment of our
share of blood screening assay revenue from 45 days to
30 days.
As part of Amendment No. 11, the parties have agreed, and
Novartis has agreed to provide certain funding, to customize our
Panther instrument, a fully automated molecular testing platform
now in development, for use in the blood screening market.
Novartis has also agreed to pay us a milestone payment upon the
first commercial sale of the Panther instrument. The parties
will equally share any profit attributable to Novartis
sale or lease of Panther instruments under the collaboration.
The parties have also agreed to evaluate, using our
technologies, the development of companion diagnostics for
current or future Novartis medicines. Novartis has agreed to
provide us with certain funding in support of initial research
and development.
3M
Corporation
In June 2008, 3M Corporation, or 3M, discontinued our
collaboration to develop rapid, molecular tests for
healthcare-associated infections, or HCAIs, due to technical
incompatibilities between our NAT technologies and
59
3Ms proprietary microfluidics instrument platform. Under
the terms of the discontinued agreement, we were responsible for
assay development, which 3M funded. 3M had also agreed to pay us
milestones based on technical and commercial progress. We earned
the first of these milestones, related to assay feasibility, in
the fourth quarter of 2007. Based on the termination of the
agreement, in June 2008 we recorded $2.7 million in
collaborative research revenue that was previously deferred. In
December 2008, we received an additional $0.4 million from
3M for costs incurred to wind down the collaboration. We are
currently exploring other opportunities to commercialize our
prototype assays in the HCAI field.
Millipore
Corporation
In January 2008, Millipore Corporation commenced
commercialization of the first MilliPROBE assay, developed under
our industrial testing collaboration, which targets the
bacterium Pseudomonas aeruginosa and is designed as an
in-process, early warning system to provide faster, more
effective detection of Pseudomonas aeruginosa in purified
water used during drug production. The assay was designed to
ensure a higher degree of water quality throughout manufacturing
processes where the contaminant can be a serious quality and
safety concern. We believe faster detection will enable
biopharmaceutical manufacturers to reduce downstream processing
risks, optimize product yields and improve final product quality.
Product
Development
In August 2008, the Food and Drug Administration, or FDA,
approved the Procleix Ultrio assay to screen donated blood,
plasma, organs and tissues for HBV in individual blood donations
or in pools of up to 16 blood samples on the enhanced
semi-automated system, or eSAS, and on the fully automated,
high-throughput TIGRIS system. The FDA had previously approved
the assay to screen donated blood for HIV-1 and HCV.
In May 2008, we launched our APTIMA HPV assay in Europe. The
APTIMA HPV assay has been CE-marked for use on the fully
automated, high-throughput TIGRIS system and our semi-automated
Direct Tube Sampling, or DTS, system.
In March 2008, we started U.S. clinical trials for our
investigational APTIMA HPV assay. The investigational APTIMA HPV
assay is an amplified nucleic acid test that is designed to
detect 14 types of high-risk human papillomavirus, or HPV, that
are associated with cervical cancer. More specifically, the
assay is designed to detect two messenger ribonucleic acids, or
mRNAs, that are made in higher amounts when HPV infections
progress toward cervical cancer. We believe that targeting these
mRNAs may more accurately identify women at higher risk of
having, or developing, cervical cancer than competing assays
that target HPV deoxyribonucleic acids, or DNA. We expect to
enroll approximately 7,000 women in the trial. Actual
enrollment, however, may vary based on the prevalence of
cervical disease among women in the trial. The trial enrollment
and testing are expected to take approximately two years. The
APTIMA HPV assay is designed to run on our fully automated,
high-throughput TIGRIS instrument system and on our future
medium-throughput instrument platforms.
Final
Payment Received in Litigation Settlement
In June 2006, we entered into a Short Form Settlement
Agreement with Bayer HealthCare LLC and Bayer Corp.,
collectively Bayer, to resolve patent litigation we filed
against Bayer in the United States District Court for the
Southern District of California and to resolve separate
commercial arbitration proceedings between the parties. On
August 1, 2006, the parties signed final, definitive
settlement documentation, referred to herein as the Settlement
Agreement. All litigation and arbitration proceedings between us
and Bayer were terminated pursuant to the Settlement Agreement.
Pursuant to the terms of the Settlement Agreement, Bayer paid us
an initial license fee of $5.0 million in August 2006.
Siemens, as assignee of Bayer, paid us $10.3 million as a
one-time royalty on January 31, 2007 and $16.4 million
as a one-time royalty on January 31, 2008. As a result of
these royalty payments, Siemens rights to the patents
subject to the Settlement Agreement are fully
paid-up and
royalty free.
Pursuant to the Settlement Agreement, we obtained certain
contract and patent rights to distribute qualitative HIV-1 and
HCV tests through October 2010. We also obtained an option to
extend our rights through the life of
60
certain HIV-1 and HCV patents. The option also permits us to
elect to extend our rights to future instrument systems (but not
to the TIGRIS instrument). We are required to exercise the
option prior to the expiration of the existing rights in October
2010 and, if exercised, pay a $1.0 million fee.
Critical
accounting policies and estimates
Our discussion and analysis of our financial condition and
results of operations is based on our consolidated financial
statements, which have been prepared in accordance with United
States generally accepted accounting principles, or
U.S. GAAP. The preparation of these consolidated financial
statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and
expenses and the related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates,
including those related to revenue recognition, the
collectability of accounts receivable, valuation of inventories
and long-lived assets, including license and manufacturing
access fees, patent costs and capitalized software, equity
investments in privately held companies, income tax and the
valuation of stock-based compensation. We base our estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, which form
the basis for making judgments about the carrying values of
assets and liabilities. Senior management has discussed the
development, selection and disclosure of these estimates with
the Audit Committee of our Board of Directors. Actual results
may differ from these estimates.
The following critical accounting policies affect the
significant judgments and estimates used in the preparation of
our consolidated financial statements.
Revenue
recognition
We record shipments of our clinical diagnostic products as
product sales when the product is shipped and title and risk of
loss has passed and when collection of the resulting receivable
is reasonably assured.
We manufacture our blood screening products according to demand
specifications of our collaboration partner, Novartis. Upon
shipment to Novartis, we recognize blood screening product sales
at an agreed upon transfer price and record the related cost of
products sold. Based on the terms of our collaboration agreement
with Novartis, our ultimate share of the net revenue from sales
to the end user is not known until reported to us by Novartis.
We then adjust blood screening product sales upon receipt of
customer revenue reports and a net payment from Novartis of
amounts reflecting our ultimate share of net sales by Novartis
of these products, less the transfer price revenues previously
recognized.
Product sales also include the sales or rental revenue
associated with the delivery of our proprietary integrated
instrument platforms that perform our diagnostic assays.
Generally, we provide our instrumentation to clinical
laboratories and hospitals without requiring them to purchase
the equipment or enter into an equipment lease. Instead, we
recover the cost of providing the instrumentation in the amounts
we charge for our diagnostic assays. The depreciation costs
associated with an instrument are charged to cost of product
sales on a straight-line basis over the estimated life of the
instrument. The costs to maintain these instruments in the field
are charged to cost of product sales as incurred.
We sell our instruments to Novartis for use in blood screening
and record these instrument sales upon delivery since Novartis
is responsible for the placement, maintenance and repair of the
units with their customers. We also sell instruments to our
clinical diagnostics customers and record sales of these
instruments upon delivery and receipt of customer acceptance.
Prior to delivery, each instrument is tested to meet our and FDA
specifications, and is shipped fully assembled. Customer
acceptance of our clinical diagnostic instrument systems
requires installation and training by our technical service
personnel. Generally, installation is a standard process
consisting principally of uncrating, calibrating, and testing
the instrumentation.
Shipments of our blood screening products in the United States
and other countries in which the products have not received
regulatory approval are recorded as collaborative research
revenue. This is done because price restrictions apply to these
products prior to FDA marketing approval in the United States
and similar approvals in foreign countries. Upon shipment of
FDA-approved and labeled products following commercial approval,
we classify sales of these products as product sales in our
consolidated financial statements.
61
We follow the provisions of Emerging Issues Task Force, or EITF,
Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables, for
multiple element revenue arrangements. EITF Issue
No. 00-21
provides guidance on how to determine when an arrangement that
involves multiple revenue-generating activities or deliverables
should be divided into separate units of accounting for revenue
recognition purposes, and if this division is required, how the
arrangement consideration should be allocated among the separate
units of accounting. If the deliverables in a revenue
arrangement constitute separate units of accounting according to
the EITF Issue
No. 00-21
separation criteria, the revenue-recognition policy must be
determined for each identified unit. If the arrangement is a
single unit of accounting, the revenue-recognition policy must
be determined for the entire arrangement, and all non-refundable
upfront license fees are deferred and recognized as revenues on
a straight-line basis over the expected term of our continued
involvement in the collaborations.
We recognize collaborative research revenue over the term of
various collaboration agreements, as negotiated monthly
contracted amounts are earned or reimbursable costs are incurred
related to those agreements. Negotiated monthly contracted
amounts are earned in relative proportion to the performance
required under the contracts. Non-refundable license fees are
recognized over the related performance period or at the time
that we have satisfied all performance obligations. Milestone
payments are recognized as revenue upon the achievement of
specified milestones when (i) we have earned the milestone
payment, (ii) the milestone is substantive in nature and
the achievement of the milestone is not reasonably assured at
the inception of the agreement, (iii) the fees are
non-refundable, and (iv) performance obligations after the
milestone achievement will continue to be funded by the
collaborator at a level comparable to the level before the
milestone achievement. Any amounts received prior to satisfying
our revenue recognition criteria are recorded as deferred
revenue on the consolidated balance sheet.
Royalty revenue is recognized related to the sale or use of our
products or technologies under license agreements with third
parties. For those arrangements where royalties are reasonably
estimable, we recognize revenue based on estimates of royalties
earned during the applicable period and adjust for differences
between the estimated and actual royalties in the following
period. Historically, these adjustments have not been material.
For those arrangements where royalties are not reasonably
estimable, we recognize revenue upon receipt of royalty
statements from the applicable licensee. Non-refundable license
fees are recognized over the related performance period or at
the time we have satisfied all performance obligations.
Valuation
of inventories
We record valuation adjustments to our inventories balances for
estimated excess and obsolete inventories equal to the
difference between the cost of such inventories and its usage
which is based upon assumptions about future product demand and
the shelf-life and expiration dates for finished goods and
materials used in the manufacturing process. We operate in an
environment that is regulated by the FDA and other governmental
agencies that may place restrictions on our ability to sell our
products in the marketplace if certain compliance requirements
are not met. We have made assumptions that are reflected in
arriving at our net inventories value based on information
currently available to us. If future product demand, regulatory
constraints or other market conditions are less favorable than
those projected by management, additional inventories valuation
reserves may be required.
We also manufacture products to conduct developmental
evaluations and clinical trials, and to validate our
manufacturing practices prior to receiving regulatory clearance
for commercial sale of our products. In these circumstances,
uncertainty exists regarding our ability to sell these products
until the FDA or other governing bodies commercially approve
them. Accordingly, the manufacturing costs of these items in
inventories are recorded as research and development, or
R&D, expense. In cases where we maintain current approved
products for further development evaluations, we may also
provide valuation allowances for these inventories due to the
historical uncertainties associated with regulated product
introductions into other markets. To the extent any of these
products are sold to end users, we record revenues and reduce
inventories reserves that are directly applicable to such
products.
For 2008, 2007 and 2006, total gross charges to our inventories
reserves have not impacted gross margin, as a percentage of
sales, by more than 1.8%. We believe that similar charges to
estimated inventories reserves, and the related effect on gross
margins, are reasonably likely in the future. Historically,
changes to inventories valuation reserves in subsequent periods
have not materially affected cost of product sales.
62
Valuation
of goodwill and long-lived assets
We assess the impairment of goodwill and long-lived assets
whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Impairment is reviewed at
least annually, generally in the fourth quarter of each year.
Factors we consider important that could trigger an impairment,
include the following:
|
|
|
|
|
Significant underperformance relative to historical or projected
future operating results;
|
|
|
|
Significant changes in the manner of our use of the acquired
assets or the strategy for our overall business;
|
|
|
|
Significant negative industry or economic trends;
|
|
|
|
Significant declines in our stock price for a sustained
period; and
|
|
|
|
Decreased market capitalization relative to net book value.
|
When there is an indication that the carrying value of goodwill
or a long-lived asset may not be recoverable based upon the
existence of one or more of the above indicators, an impairment
loss is recognized if the carrying amount exceeds its fair value.
Our impairment analyses require management to make assumptions
and to apply judgment to estimate future cash flows and asset
fair values, including estimating the profitability of future
business strategies. We have not made any material changes in
our impairment assessment methodology during the past three
fiscal years. We do not believe there is a reasonable likelihood
that there will be a material change in the estimates or
assumptions we use to calculate long-lived asset impairment
losses. However, if actual results are not consistent with our
estimates and assumptions used in estimating future cash flows
and asset fair values, we may be exposed to losses that could be
material.
Capitalized
software costs
We capitalize costs incurred in the development of computer
software related to products under development after
establishment of technological feasibility in accordance with
Statement of Financial Accounting Standards, or SFAS,
No. 86, Accounting for the Costs of Computer Software
to Be Sold, Leased, or Otherwise Marketed. These
capitalized costs are recorded at the lower of unamortized cost
or net realizable value and are amortized over the estimated
life of the related product.
At December 31, 2008, capitalized software development
costs related to products for use on our TIGRIS instrument
totaled $13.4 million, net of accumulated amortization. We
began amortizing the capitalized software costs on a
straight-line basis over 120 months in May 2004, coinciding
with the general release of TIGRIS instruments to our customers.
Income
taxes
Our income tax returns are based on calculations and assumptions
that are subject to examination by various tax authorities.
While we believe we have appropriate support for the positions
taken on our tax returns, we regularly assess the potential
outcomes of these examinations and any future examinations in
determining the adequacy of our provision for income taxes. As
part of our assessment of potential adjustments to our tax
returns, we increase our current tax liability to the extent an
adjustment would result in a cash tax payment or decrease our
deferred tax assets to the extent an adjustment would not result
in a cash tax payment. We review, at least quarterly, the
likelihood and amount of potential adjustments and adjust the
income tax provision, the current tax liability and deferred
taxes in the period in which the facts that give rise to a
revision become probable and estimable. Although we believe that
the estimates and assumptions supporting our assessments are
reasonable, adjustments could be materially different from those
that are reflected in historical income tax provisions and
recorded assets and liabilities.
We regularly review our deferred tax assets for recoverability
and establish a valuation allowance based on historical taxable
income, projected future taxable income, the expected timing of
the reversals of existing temporary differences and the
implementation of tax-planning strategies.
63
Stock-based
compensation
We grant options to purchase our common stock to our employees
and directors under our equity compensation plans. Eligible
employees can also purchase shares of our common stock at 85% of
the lower of the fair market value on the first or the last day
of each six-month offering period under our Employee Stock
Purchase Plan, or ESPP. The benefits provided under these plans
are share-based payments subject to the provisions of revised
SFAS No. 123(R), Share-Based Payment.
Under SFAS No. 123(R), stock-based compensation cost
is measured at the grant date, based on the estimated fair value
of the award, and is recognized as expense over the
employees requisite service period. We have no awards with
market or performance conditions. We adopted the provisions of
SFAS No. 123(R) on January 1, 2006, using a
modified prospective application. Accordingly, prior periods
have not been revised for comparative purposes. Stock-based
compensation expense recognized is based on the value of
share-based payment awards that are ultimately expected to vest,
which coincides with the award holders requisite service
period.
We estimate the value of our share-based payment awards using
the Black-Scholes-Merton option-pricing model, and amortize all
new grants as expense on a straight-line basis over the vesting
period. Also, a portion of these costs are capitalized into
inventories on our balance sheet, and are recognized as expense
when the related products are sold.
Our stock options and the option component of our ESPP shares
have characteristics significantly different from those of
traded options, and changes in the assumptions can materially
affect the fair value estimates. Because valuation model
assumptions are subjective, in our opinion, existing valuation
models, including the Black-Scholes-Merton model, may not
provide reliable measures of the fair values of our share-based
payment awards. There is not currently a generally accepted
market-based mechanism or other practical application to verify
the reliability and accuracy of the estimates stemming from
these valuation models. Although we estimate the fair value of
employee share-based payment awards in accordance with
SFAS No. 123(R) and the Securities and Exchange
Commissions Staff Accounting Bulletin No. 107,
or SAB No. 107, the option-pricing model we use may
not produce a value that is indicative of the fair value
achieved in a willing buyer/willing seller market transaction.
The determination of fair value of share-based payment awards on
the date of grant using the Black-Scholes-Merton model is
affected by our stock price and the implied volatility on our
traded options, as well as the input of other subjective
assumptions. These assumptions include, but are not limited to,
the expected term of stock options and our expected stock price
volatility over the term of the awards. We use a blend of
historical and implied volatility for the expected volatility
assumption. We believe this not only takes into account past
experience, but also expectations of how future volatility will
differ from historical volatility. For purposes of estimating
the fair value of stock options granted to employees during the
year ended December 31, 2008, we used a weighted average
stock price volatility of 34%. If our stock price volatility
assumptions were to increase 25% to 42%, the weighted average
estimated fair value of stock options granted during the year
ended December 31, 2008 would increase by $3.45 per share,
or 19%.
The expected term of stock options granted represents the period
of time that they are expected to be outstanding. We use a
midpoint scenario method, which assumes that all vested,
outstanding options are settled halfway between the date of
measurement and their expiration date. The calculation also
leverages the history of actual exercises and post-vesting
cancellations. For purposes of estimating the fair value of
stock options granted to employees during the year ended
December 31, 2008 we used an expected term of
4.2 years. If our expected term were to increase by one
year to 5.2 years, the weighted average estimated fair
value of stock options granted during the year ended
December 31, 2008 would increase by $2.29 per share, or 12%.
SFAS No. 123(R) requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. We
assess the forfeiture rate on a quarterly basis and revise the
rate when deemed necessary.
64
Adoption
of recent accounting pronouncements
SFAS No. 157
Effective January 1, 2008, we adopted
SFAS No. 157, Fair Value Measurements, for
financial assets and liabilities measured at fair value.
SFAS No. 157 defines fair value, expands disclosure
requirements around fair value and specifies a hierarchy of
valuation techniques based on whether the inputs to those
valuation techniques are observable or unobservable. Observable
inputs reflect market data obtained from independent sources,
while unobservable inputs reflect our market assumptions. These
two types of inputs create the following fair value hierarchy:
|
|
|
|
|
Level 1 Quoted prices for identical instruments
in active markets.
|
|
|
|
Level 2 Quoted prices for similar instruments
in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived
valuations in which all significant inputs and significant value
drivers are observable in active markets.
|
|
|
|
Level 3 Valuations derived from valuation
techniques in which one or more significant inputs or
significant value drivers are unobservable.
|
This hierarchy requires us to use observable market data, when
available, and to minimize the use of unobservable inputs when
determining fair value. A financial instruments
categorization within the valuation hierarchy is based upon the
lowest level of input that is significant to the fair value
measurement.
Following is a description of our valuation methodologies used
for instruments measured at fair value. Where appropriate, the
description includes details of the valuation models, the key
inputs to those models, as well as any significant assumptions.
Available-for-sale
securities
Our available-for-sale securities are comprised of tax
advantaged municipal securities and money market funds. When
available, we generally use quoted market prices to determine
fair value, and classify such items as Level 1. If quoted
market prices are not available, prices are determined using
prices for recently traded financial instruments with similar
underlying terms as well as directly or indirectly observable
inputs, such as interest rates and yield curves that are
observable at commonly quoted intervals. We classify such items
as Level 2. At December 31, 2008, we reported
$15.5 million and $449.7 million of assets measured at
fair value on a recurring basis as Level 1 and 2,
respectively.
Equity
investment in private company
In 2006, we invested in Qualigen, Inc., or Qualigen, a private
company. The valuation of investments in non-public companies
requires significant management judgment due to the absence of
quoted market prices, inherent lack of liquidity and the
long-term nature of such assets. Our equity investments in
private companies are valued initially based upon the
transaction price under the cost method of accounting. Such
instruments are not measured at fair value on an ongoing basis
but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of
impairment). At December 31, 2008, we reported
$5.4 million, or 1.1%, of assets measured at fair value on
a non-recurring basis as Level 3 in the fair value
hierarchy.
We record impairment charges when we believe an investment has
experienced a decline that is other-than-temporary. The
determination that a decline is other-than-temporary is, in
part, subjective and influenced by many factors. Future adverse
changes in market conditions or poor operating results of
investees could result in losses or an inability to recover the
carrying value of the investments, thereby possibly requiring
impairment charges in the future. When assessing investments in
private companies for an other-than-temporary decline in value,
we consider many factors including, but not limited to, the
following: the share price from the investees latest
financing round, the performance of the investee in relation to
its own operating targets and its business plan, the
investees revenue and cost trends, the investees
liquidity and cash position, including its cash burn rate, and
market acceptance of the investees products and services.
From time to time, we may consider third party evaluations or
valuation reports. We also consider new products
and/or
services that the investee may have forthcoming, any significant
news
65
specific to the investee, the investees competitors
and/or
industry and the outlook of the overall industry in which the
investee operates. In the event our judgments change as to
other-than temporary declines in value, we may record an
impairment loss, which could have an adverse impact on our
results of operations.
During the third quarter of 2008, we received financial
statements from Qualigen that indicated potential issues towards
the execution of their long-term sales plans. As a result, with
the consultation and assistance of a third party valuation
company, and the support of Qualigen management, we performed a
valuation of Qualigen. The valuation of our investment was based
upon several factors and included both a market approach and an
income (discounted cash flow method) approach. The range of
these two approaches resulted in a potential value of our
investment between $4.2 million and $6.6 million. We
concluded that an equal weighting of the market and income
methods was appropriate and as a result of this valuation our
ownership of Qualigen was valued at approximately
$5.4 million. We believe that the decline in the value of
this investment from our initial cost basis was an
other-than-temporary impairment of our investment and thus we
recorded an impairment charge of $1.6 million to write down
the carrying value of our equity interest. This amount is
included in Other income/(expense) on the
consolidated statements of income.
SFAS No. 159
Effective January 1, 2008, we adopted
SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities Including
an amendment of FASB Statement No. 115, which expands
the use of fair value accounting but does not affect existing
standards that require assets or liabilities to be carried at
fair value. Under SFAS No. 159, a company may elect to
use fair value to measure accounts and loans receivable,
available-for-sale and held-to-maturity securities, equity
method investments, accounts payable, guarantees and issued
debt. Other eligible items include firm commitments for
financial instruments that otherwise would not be recognized at
inception and non-cash warranty obligations where a warrantor is
permitted to pay a third party to provide the warranty goods or
services. If the use of fair value is elected, any upfront costs
and fees related to the item must be recognized in earnings and
cannot be deferred (e.g., debt issue costs). The fair value
election is irrevocable and generally made on an
instrument-by-instrument
basis, even if a company has similar instruments that it elects
not to measure based on fair value. At the adoption date,
unrealized gains and losses on existing items for which fair
value has been elected are reported as a cumulative adjustment
to beginning retained earnings. Subsequent to the adoption of
SFAS No. 159, changes in fair value are recognized in
earnings. During 2008, we did not elect fair value as an
alternative measurement for any financial instruments not
previously carried at fair value.
EITF
Issue
No. 07-3
Effective January 1, 2008, we adopted EITF Issue
No. 07-3,
Accounting for Non-Refundable Payments for Goods or
Services Received for Use in Future Research and Development
Activities. EITF Issue
No. 07-3
requires that non-refundable advance payments for goods or
services that will be used or rendered for future research and
development activities be deferred and capitalized and
recognized as an expense as the goods are delivered or the
related services are performed. There was no material financial
statement impact as a result of adoption.
Pending
adoption of recent accounting pronouncements
SFAS No. 141(R)
In December 2007, the Financial Accounting Standards Board, or
FASB, issued SFAS No. 141(R), Business
Combinations. SFAS No. 141(R) changes the
requirements for an acquirers recognition and measurement
of the assets acquired and liabilities assumed in a business
combination, including the treatment of contingent
consideration, pre-acquisition contingencies, transaction costs,
in-process research and development and restructuring costs. In
addition, under SFAS No. 141(R), changes in an
acquired entitys deferred tax assets and uncertain tax
positions after the measurement period will impact income tax
expense. This statement is effective with respect to business
combination transactions for which the acquisition date is after
December 31, 2008.
66
SFAS No. 160
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements (an amendment of Accounting Research Bulletin, or
ARB, No. 51). SFAS No. 160 requires that
noncontrolling (minority) interests be reported as a component
of equity, that net income attributable to the parent and to the
non-controlling interest be separately identified in the income
statement, that changes in a parents ownership interest
while the parent retains its controlling interest be accounted
for as equity transactions, and that any retained noncontrolling
equity investment upon the deconsolidation of a subsidiary be
initially measured at fair value. This statement is effective
for fiscal years beginning after December 31, 2008, and
shall be applied prospectively. However, the presentation and
disclosure requirements of SFAS No. 160 are required
to be applied retrospectively for all periods presented. The
retrospective presentation and disclosure requirements of this
statement will be applied to any prior periods presented in
financial statements for the fiscal year ending
December 31, 2009, and later periods during which we have a
consolidated subsidiary with a noncontrolling interest. As of
December 31, 2008, we do not have any consolidated
subsidiaries in which there is a noncontrolling interest.
EITF
Issue
No. 07-1
In November 2007, the FASB ratified EITF Issue
No. 07-1,
Accounting for Collaborative Agreements Related to the
Development and Commercialization of Intellectual
Property. EITF Issue
No. 07-1
defines collaborative agreements as a contractual arrangement in
which the parties are active participants to the arrangement and
are exposed to the significant risks and rewards that are
dependent on the ultimate commercial success of the endeavor.
Additionally, it requires that revenue generated and costs
incurred on sales to third parties as it relates to a
collaborative agreement be recognized as gross or net based on
EITF Issue
No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an
Agent. Essentially, this requires the party that is
identified as the principal participant in a transaction to
record the transaction on a gross basis in its financial
statements. It also requires payments between participants to be
accounted for in accordance with already existing generally
accepted accounting principles, unless none exist, in which case
a reasonable, rational, consistent method should be used. We
will adopt this guidance effective January 1, 2009 for all
collaboration agreements existing as of that date. We do not
believe that the adoption of EITF Issue
No. 07-1
will have a material impact on our financial statements, as we
believe all collaboration agreements are currently in compliance
with this standard.
Results
of Operations
Amounts and percentages in the following tables and throughout
our discussion and analysis of financial conditions and results
of operations may reflect rounding adjustments. Percentages have
been rounded to the nearest whole percentage.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
% Change
|
|
(Dollars in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008/2007
|
|
|
2007/2006
|
|
|
Product Sales
|
|
$
|
429.2
|
|
|
$
|
370.9
|
|
|
$
|
325.3
|
|
|
|
16
|
%
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenues
|
|
|
91
|
%
|
|
|
92
|
%
|
|
|
92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our primary source of revenue comes from product sales, which
consist primarily of the sale of clinical diagnostic and blood
screening products in the United States. Our clinical diagnostic
products include our APTIMA, PACE, AccuProbe and Amplified
Mycobacterium Tuberculosis Direct Test product lines. The
principal customers for our clinical diagnostics products
include large reference laboratories, public health institutions
and hospitals. The blood screening assays and instruments we
manufacture are marketed worldwide through our collaboration
with Novartis under the Procleix and Ultrio trademarks.
We recognize product sales from the manufacture and shipment of
tests for screening donated blood at the contractual transfer
prices specified in our collaboration agreement with Novartis
for sales to end-user blood bank facilities located in countries
where our products have obtained governmental approvals. Blood
screening product
67
sales are then adjusted monthly corresponding to Novartis
payment to us of amounts reflecting our ultimate share of net
revenue from sales by Novartis to the end user, less the
transfer price revenues previously recorded. Net sales are
ultimately equal to the sales of the assays by Novartis to third
parties, less freight, duty and certain other adjustments
specified in our collaboration agreement with Novartis
multiplied by our share of the net revenue.
Product sales increased 16% in 2008 from 2007. The
$58.3 million increase was primarily attributed to
$31.9 million in higher blood screening assay sales and
$29.6 million in higher APTIMA assay sales, partially
offset by a $6.6 million decrease in PACE product sales as
customers continue to convert to the more sensitive amplified
APTIMA product line.
Diagnostic product sales, including assay, instrument, and
ancillary sales, represented $222.9 million, or 52% of
product sales in 2008, compared to $199.2 million, or 54%
of product sales in 2007. This $23.7 million increase was
primarily driven by volume gains in our APTIMA product line as
the result of PACE conversions, market share gains we attribute
to the superior clinical performance of our assay and the
availability of our fully automated TIGRIS instrument. Overall
APTIMA growth was partially offset by a $6.6 million
decrease in PACE product sales as customers continue to convert
to the more sensitive amplified APTIMA product line. In 2008,
APTIMA sales were approximately 87% of our STD product sales
versus PACE sales of 13%. In 2007, APTIMA represented 82% of STD
product sales, and PACE 18%. Average pricing in 2008 related to
our APTIMA products decreased approximately 3% from 2007
primarily related to strong unit growth in our corporate account
sector. Approximately $20.3 million of our diagnostic
product sales are denominated in currencies other than the
U.S. dollar. In 2008, we estimate that the growth of our
diagnostic product sales over 2007 was negatively affected by
$0.3 million as the result of a stronger average
U.S. dollar versus foreign currencies.
Blood screening related sales, including assay, instrument, and
ancillary sales, represented $206.3 million, or 48% of
product sales in 2008, compared to $171.7 million, or 46%
of product sales in 2007. This $34.6 million increase was
principally attributed to the March 2007 approval and commercial
pricing of our WNV assay for use on the TIGRIS instrument, as
well as international expansion of Procleix Ultrio sales by
Novartis. In 2008, United States blood donation volumes screened
using the Procleix blood screening family of assays increased 4%
over 2007 levels, while the related pricing increased 6%.
International revenues increased as the Procleix Ultrio product
further penetrated international markets. Included in the blood
screening results for 2008 was a one-time $2.6 million
benefit related to an adjustment to service costs previously
deducted by Novartis prior to arriving at our net share of
revenue under the collaboration. In addition, we estimate that
$5.0 million of the growth in 2008 over 2007 was related to
foreign currency gains associated with favorable exchange rates,
primarily the weaker U.S. dollar versus the Euro, on
revenues collected under our collaboration with Novartis.
Product sales increased 14% in 2007 from 2006. The
$45.6 million increase was primarily attributed to
$32.3 million in higher APTIMA assay sales and
$21.8 million in higher blood screening assay sales,
partially offset by a $10.6 million decrease in PACE
product sales.
Diagnostic product sales, including assay, instrument, and
ancillary sales, represented $199.2 million, or 54% of
product sales in 2007, compared to $171.2 million, or 53%
of product sales in 2006. This $28.0 million increase was
primarily driven by volume gains in our APTIMA product line as
the result of PACE conversions, and market share gains
attributed to the assays clinical performance and the
availability of our fully automated TIGRIS instrument. The
remaining growth in diagnostics was primarily the result of an
increase in diagnostic instrumentation sales, which increased by
$5.9 million from 2006 levels. Overall APTIMA growth was
partially offset by a related $10.6 million decrease in
PACE product sales as customers converted to the more sensitive
amplified APTIMA product line. In general, the price of our
amplified APTIMA test is twice that of our
non-amplified
PACE product, thus the conversion from PACE to APTIMA drives an
overall increase in product sales even if underlying testing
volumes remain the same. In 2007, APTIMA sales were
approximately 82% of our STD product sales versus PACE sales of
18%. In 2006, APTIMA represented 72% of STD product sales, and
PACE 28%. Average pricing in 2007 related to our primary APTIMA
products remained consistent with 2006 levels.
In 2006, our WNV assay was approved on our semi-automated
instrument system. As a result, revenues from the sale of our
WNV assay began to be recorded as product sales at higher
commercial prices. Prior to approval,
68
revenues were recorded as collaborative research revenues, which
were solely based upon cost recovery pricing. In 2006, we
recorded approximately $9.2 million of WNV sales as
collaborative research revenue. In 2007, the increase in WNV
product sales was $14.8 million over 2006 levels as a
result of a full year of recognizing revenue as product sales
and higher pricing associated with post-approval commercial
pricing. In addition, in 2007, aggregate product sales related
to sales of our Procleix HIV-1/HCV assay and our Ultrio assay,
which includes an assay for HBV that is combined in one test
with the HIV-1/HCV assay, increased by $7.0 million over
2006 levels, primarily attributable to an increase in
international testing volumes and higher world wide shipment
volumes.
Blood screening related sales, including assay, instrument, and
ancillary sales, represented $171.7 million, or 46% of
product sales in 2007, compared to $154.1 million, or 47%
of product sales in 2006. The $17.6 million increase in
blood screening sales during 2007 was principally attributed to
the approval and commercial launch of our WNV assay for use on
the TIGRIS instrument, as well as international expansion of
Procleix Ultrio sales. Our share of blood screening revenues is
based upon sales of assays by Novartis, on blood donation levels
and the related price per donation. In 2007, United States blood
donation volumes screened using the Procleix HIV-1/HCV assay
were relatively consistent with 2006 levels, as was the related
pricing. International revenues increased as blood donations
screened using either the Procleix HIV-1/HCV assay or the
Procleix Ultrio assay grew approximately 7% from 2006 levels, as
the Procleix Ultrio product further penetrated international
markets. Partially offsetting the growth of WNV and the Procleix
and Ultrio products in 2007 was a reduction in the sales of
blood screening instrumentation, which declined by
$4.2 million from 2006 levels. The decline in the sale of
blood screening instrumentation was primarily driven by a
decrease in the sales of spare parts and components for the
TIGRIS system, as Novartis began to acquire these parts and
components directly from the manufacturer of the TIGRIS
instrument in early 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
% Change
|
|
(Dollars in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008/2007
|
|
|
2007/2006
|
|
|
Collaborative Research Revenue
|
|
$
|
20.6
|
|
|
$
|
16.6
|
|
|
$
|
16.0
|
|
|
|
24
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenues
|
|
|
4
|
%
|
|
|
4
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recognize collaborative research revenue over the term of
various collaboration agreements, as negotiated monthly
contracted amounts are earned or reimbursable costs are incurred
related to those agreements. Negotiated monthly contracted
amounts are earned in relative proportion to the performance
required under the contracts. Non-refundable license fees are
recognized over the related performance period or at the time
that we have satisfied all performance obligations. Milestone
payments are recognized as revenue upon the achievement of
specified milestones. In addition, we record as collaborative
research revenue shipments of blood screening products in the
United States and other countries in which the products have not
received regulatory approval. This is done because restrictions
apply to these products prior to FDA marketing approval in the
United States and similar approvals in foreign countries.
The costs associated with collaborative research revenue are
based on fully burdened full time equivalent rates and are
reflected in our consolidated statements of income under the
captions Research and development, Marketing
and sales and General and administrative,
based on the nature of the costs. We do not separately track all
of the costs applicable to collaborations and, therefore, are
not able to quantify all of the direct costs associated with
collaborative research revenue.
Collaborative research revenue increased 24% in 2008 from 2007.
The $4.0 million increase was primarily due to the
$10.0 million milestone payment received from Novartis
based on the FDAs approval of our TIGRIS instrument system
for use with our Ultrio assay, and an increase of
$3.6 million from 3M for the development of rapid nucleic
acid tests to detect certain dangerous healthcare-associated
infections. This collaboration with 3M was discontinued in June
2008. These increases were partially offset by $3.6 million
in lower funding revenues from the United States Army Medical
Research and Material Command for the development of improved
cancer diagnostic assays, as that contract expired in the fourth
quarter of 2007, a $1.5 million decrease in funding
revenues from Novartis for Ultrio assay development as that
program nears completion, and a $3.9 million decrease in
funding from 3M related to our food testing program that was
discontinued in November 2007.
69
Collaborative research revenue increased 4% in 2007 from 2006.
The $0.6 million increase from the prior year was primarily
the result of a $4.1 million increase in reimbursement from
Novartis for blood screening development programs, a
$3.9 million increase from 3M for work on the food testing
and healthcare-associated infection programs, and a
$3.6 million increase from the United States Army Medical
Research and Material Command for work on the development of
improved cancer diagnostic assays. These increases were
partially offset by a $9.2 million decrease in revenue from
Novartis related to deliveries of WNV tests on a cost
recovery basis until May 2006 (now recorded as product
sales) and a $1.4 million decrease in reimbursement from
one of our industrial partners for certain assay development
costs.
Collaborative research revenue tends to fluctuate based on the
amount of research services performed, the status of projects
under collaboration and the achievement of milestones. Due to
the nature of our collaborative research revenues, results in
any one period are not necessarily indicative of results to be
achieved in the future. Our ability to generate additional
collaborative research revenues depends, in part, on our ability
to initiate and maintain relationships with potential and
current collaborative partners and the advancement of related
collaborative research and development. These relationships may
not be established or maintained and current collaborative
research revenue may decline.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
% Change
|
|
(Dollars in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008/2007
|
|
|
2007/2006
|
|
|
Royalty and License Revenue
|
|
$
|
22.9
|
|
|
$
|
15.5
|
|
|
$
|
13.5
|
|
|
|
48
|
%
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenues
|
|
|
5
|
%
|
|
|
4
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recognize revenue for royalties due to us upon the
manufacture, sale or use of our products or technologies under
license agreements with third parties. For those arrangements
where royalties are reasonably estimable, we recognize revenue
based on estimates of royalties earned during the applicable
period and adjust for differences between the estimated and
actual royalties in the following period. Historically, these
adjustments have not been material. For those arrangements where
royalties are not reasonably estimable, we recognize revenue
upon receipt of royalty statements from the applicable licensee.
Non-refundable license fees are recognized over the related
performance period or at the time that we have satisfied all
performance obligations.
Our royalty and license revenue during 2008 and 2007 consisted
primarily of settlement payments received from Siemens, as an
assignee of Bayer ($16.4 million in 2008 and
$10.3 million in 2007). Siemens has now paid all amounts
due to us under the Settlement Agreement, and thus these
payments will not recur in future periods. The $7.4 million
increase in royalty and license revenue during 2008 from 2007
was primarily the result of $6.1 million in higher amounts
received from Bayer under the Settlement Agreement,
$0.6 million in higher blood plasma royalties from
Novartis, and $0.5 million in higher royalties from Becton
Dickinson.
Royalty and license revenue increased 15% in 2007 from 2006. The
$2.0 million increase in royalty and license revenue in
2007 was principally attributed to a $5.3 million increase
in license fee revenue from Bayer pursuant to the terms of our
settlement agreement, partially offset by a decrease of
$3.3 million, the amount received from bioMérieux in
2006 for out-licensing of RNA technology for which options on
additional targets were not exercised in 2007.
Royalty and license revenue may fluctuate based on the nature of
the related agreements and the timing of receipt of license
fees. Results in any one period are not necessarily indicative
of results to be achieved in the future. In addition, our
ability to generate additional royalty and license revenue will
depend, in part, on our ability to
70
market and capitalize on our technologies. We may not be able to
do so and future royalty and license revenue may decline.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
% Change
|
|
(Dollars in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008/2007
|
|
|
2007/2006
|
|
|
Cost of Product Sales
|
|
$
|
128.0
|
|
|
$
|
119.6
|
|
|
$
|
103.9
|
|
|
|
7
|
%
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit margin as a percent of product sales
|
|
|
70
|
%
|
|
|
68
|
%
|
|
|
68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales includes direct material, direct labor,
and manufacturing overhead associated with the production of
inventories. Other components of cost of product sales include
royalties, warranty costs, instrument and software amortization
and allowances for scrap.
In addition, we manufacture significant quantities of materials,
development lots, and clinical trial lots of product prior to
receiving FDA approval for commercial sale. The majority of
costs associated with development lots are classified as
R&D expense. The portion of a development lot that is
manufactured for commercial sale outside the United States is
capitalized to inventory and classified as cost of product sales
upon shipment.
Our blood screening manufacturing facility has operated, and
will continue to operate, below its potential capacity for the
foreseeable future. A portion of this available capacity is
utilized for R&D activities as new product offerings are
developed for commercialization. As a result, certain operating
costs of our blood screening manufacturing facility, together
with other manufacturing costs for the production of
pre-commercial development lot assays that are delivered under
the terms of an Investigational New Drug, or IND, application,
are classified as R&D expense prior to FDA approval.
Cost of sales increased 7% in 2008 from 2007. Of this
$8.4 million increase, $7.3 million was attributed to
increased shipments of blood screening products,
$6.2 million was attributed to increased APTIMA sales,
$1.8 million was attributed to increased amortization of
capitalized intangible assets, $1.5 million was attributed
to higher instrument sales and instrument related costs, and
$0.7 million was attributed to increased viral sales. These
2008 increases were partially offset by a $9.3 million
benefit versus 2007 as a result of higher production volumes.
Cost of product sales increased 15% in 2007 from 2006. The
$15.7 million increase in cost of product sales was
primarily due to $5.9 million in higher Procleix Ultrio
assay shipments, $5.1 million in higher APTIMA shipments,
$2.0 million in higher WNV assay shipments, and
$1.7 million in higher instrument amortization costs
associated with a higher installed base of instruments.
Our gross profit margin as a percentage of product sales
increased to 70% in 2008 from 68% in 2007 and 2006. The increase
in gross profit margin percentage was principally attributed to
increased sales of blood screening assays by Novartis and
increased APTIMA sales, which have higher margins, and favorable
changes in production volumes, partially offset by increased
instrument sales, which have lower margins, and instrument
related costs and increased amortization of capitalized
intangible assets.
Cost of product sales may fluctuate significantly in future
periods based on changes in production volumes for both
commercially approved products and products under development or
in clinical trials. Cost of product sales are also affected by
manufacturing efficiencies, allowances for scrap or expired
materials, additional costs related to initial production
quantities of new products after achieving FDA approval, and
contractual adjustments, such as instrumentation costs,
instrument service costs and royalties.
A portion of our blood screening revenues is from sales of
TIGRIS instruments to Novartis, which totaled
$12.4 million, $9.4 million, and $9.7 million
during 2008, 2007 and 2006, respectively. Under our
collaboration agreement with Novartis, we sell TIGRIS
instruments to them at prices that approximate cost. These
instrument sales, therefore, negatively impact our gross margin
percentage in the periods when they occur, but are a necessary
precursor to increased sales of blood screening assays in the
future.
71
Certain blood screening markets are trending from pooled testing
of large numbers of donor samples to smaller pool sizes. A
greater number of tests will be required in markets where
smaller pool sizes are required. The greater number of tests
required for smaller pool sizes will increase our variable
manufacturing costs, including costs of raw materials and labor.
In 2008, we were responsible for 100% of the cost of goods sold
pursuant to our collaboration agreement with Novartis. Effective
January 1, 2009, our amended collaboration agreement with
Novartis provides that we will recover 50% of our costs of goods
sold incurred in connection with the collaboration. If the price
per donor or total sales volume does not increase in line with
the increase in our total variable manufacturing costs, our
gross profit margin percentage from sales of blood screening
assays will decrease upon adoption of smaller pool sizes. We
have already observed this trend with respect to certain sales
internationally. We are not able to predict accurately the
ultimate extent to which our gross profit margin percentage will
be negatively affected as a result of smaller pool sizes,
because we do not know the ultimate selling price that Novartis
will charge to the end user or the degree to which smaller pool
size testing will be adopted across the markets in which we sell
our products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
% Change
|
|
(Dollars in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008/2007
|
|
|
2007/2006
|
|
|
Research and Development
|
|
$
|
101.1
|
|
|
$
|
97.2
|
|
|
$
|
84.6
|
|
|
|
4
|
%
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenues
|
|
|
21
|
%
|
|
|
24
|
%
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We invest significantly in R&D as part of our ongoing
efforts to develop new products and technologies. Our R&D
expenses include the development of proprietary products and
instrument platforms, as well as expenses related to the
development of new products and technologies in collaboration
with our partners. R&D spending is dependent on the status
of projects under development and may vary substantially between
quarterly or annual reporting periods. We expect to incur
additional costs associated with our research and development
activities. The additional costs include the development and
validation activities for our PCA3 and HPV assays, development
of Panther, our fully automated system for low and mid-volume
laboratories, assay integration activities for Panther,
development and validation of assays for blood screening and
industrial applications, and on-going research and early stage
development activities. Although total R&D dollars may
increase over time, we expect our R&D expenses as a
percentage of total revenues to decline in future years.
R&D expenses increased 4% in 2008 from 2007. The
$3.9 million increase was primarily due to a
$4.8 million increase in clinical evaluations and outside
services associated with our Procleix Ultrio yield studies, for
which we received blood screening approval in August 2008, HPV
trials which began in March 2008, as well as our license
agreement with Xceed, $2.7 million in higher amortization
charges due in part to an impairment charge associated with our
Corixa license agreement, and an increase of $1.3 million
in salaries and personnel-related expenses. These increases were
partially offset by a $3.0 million decrease in development
lot activity, primarily related to timing of our HPV diagnostic
product, and a $0.8 million decrease in professional fees
for consultant services no longer utilized in 2008.
R&D expenses increased 15% in 2007 from 2006. The
$12.6 million increase in R&D spending was primarily
due to $4.1 million in oligonucleotide purchases for
development lot builds, $2.9 million in higher allocations
of facilities and information systems, $2.4 million in
higher outside services to support development projects such as
industrial applications, a $1.6 million increase in
salaries and personnel-related expenses due to higher staffing
levels, a $1.4 million increase in depreciation and
amortization due to replacement of equipment in 2007 and a
$1.3 million increase in professional fees. These increases
were partially offset by a $3.0 million decrease in
stock-based compensation expense due to increased forfeitures
related to employee turnover.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
% Change
|
|
(Dollars in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008/2007
|
|
|
2007/2006
|
|
|
Marketing and Sales
|
|
$
|
45.9
|
|
|
$
|
39.9
|
|
|
$
|
37.1
|
|
|
|
15
|
%
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenues
|
|
|
10
|
%
|
|
|
10
|
%
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
Our marketing and sales expenses include salaries and other
personnel-related expenses, promotional expenses, and outside
services.
Marketing and sales expenses increased 15% in 2008 from 2007.
The $6.0 million increase was primarily due to a
$3.3 million increase in salaries and personnel-related
expenses resulting from the hiring of additional employees, a
$1.3 million increase in spending for marketing studies and
promotional activities, and a $0.6 million increase in
travel expenses, all of which were a result of our increased
international market development efforts and PCA3 and HPV market
development.
Marketing and sales expenses increased 8% in 2007 from 2006. The
$2.8 million increase in marketing and sales expenses was
primarily due to a $1.6 million increase in spending for
marketing research and materials related to international
expansion and $1.2 million in higher salaries and
personnel-related expenses to support product sales growth,
partially offset by a $0.5 million decrease in stock-based
compensation expense due to increased forfeitures related to
employee turnover.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
% Change
|
|
(Dollars in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008/2007
|
|
|
2007/2006
|
|
|
General and Administrative
|
|
$
|
52.3
|
|
|
$
|
47.0
|
|
|
$
|
44.9
|
|
|
|
11
|
%
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenues
|
|
|
11
|
%
|
|
|
12
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our general and administrative, or G&A, expenses include
expenses for finance, legal, strategic planning and business
development, public relations and human resources.
G&A expenses increased 11% in 2008 from 2007. The
$5.3 million increase was primarily the result of a
$3.6 million increase in professional fees, primarily legal
and business development expenses, a $2.1 million increase
in salaries and personnel-related expenses and a
$1.3 million increase in commercial and investment banking
charges, primarily attributable to our counterbid to acquire
Innogenetics. These increases were partially offset by a
$1.2 million decrease in relocation expenses associated
with senior level personnel hired in the prior year.
G&A expenses increased 5% in 2007 from 2006. The
$2.1 million increase in G&A expenses was primarily
the result of a $5.3 million increase in salaries and
personnel-related expenses due principally to increased
personnel and a $0.7 million increase in service contracts
due principally to software and equipment upgrades. These
increases were offset by a $2.4 million decrease in legal
fees, as 2006 included fees associated with our two patent
infringement lawsuits against Bayer, including a
$2.0 million payment to our outside litigation counsel in
connection with the Bayer settlement, as well as a
$1.3 million decrease in stock-based compensation expense
due to increased forfeitures related to employee turnover.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
% Change
|
|
(Dollars in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008/2007
|
|
|
2007/2006
|
|
|
Interest income
|
|
$
|
16.8
|
|
|
$
|
12.8
|
|
|
$
|
8.3
|
|
|
|
31
|
%
|
|
|
54
|
%
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
N/M
|
|
|
|
N/M
|
|
Other income / (expense)
|
|
|
(1.3
|
)
|
|
|
(0.5
|
)
|
|
|
0.5
|
|
|
|
160
|
%
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
$
|
15.5
|
|
|
$
|
12.3
|
|
|
$
|
8.7
|
|
|
|
26
|
%
|
|
|
41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $4.0 million increase in interest income in 2008 from
2007 was primarily a result of higher average balances of our
short-term investments, which on average increased by
$158.1 million, or 54%. Included in the $0.8 million
net increase in other expense was a $1.6 million gain
resulting from the sale of our equity interest in Molecular
Profiling Institute, Inc., which was offset by an impairment
charge of $1.6 million related to our investment in
Qualigen. The remaining $0.8 million was from realized
foreign currency exchange losses.
73
The $3.6 million net increase total other income, net in
2007 from 2006 was primarily due to an increase of
$4.5 million in interest income resulting from higher
average balances of our short-term investments, offset by
$0.9 million in realized foreign currency exchange losses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
% Change
|
|
(Dollars in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008/2007
|
|
|
2007/2006
|
|
|
Income Tax Expense
|
|
$
|
53.9
|
|
|
$
|
25.5
|
|
|
$
|
33.5
|
|
|
|
111%
|
|
|
|
(24
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of income before tax
|
|
|
34%
|
|
|
|
23%
|
|
|
|
36%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense, as a percentage of pre-tax income, increased
in 2008 from 2007. This increase was principally attributed to
the 2007 completion of federal and state audits of our tax
returns through 2004, which resulted in $11.1 million of
net tax benefits for reserves in excess of audit adjustments.
Income tax expense decreased 24% in 2007 from 2006 and our
effective tax rate decreased to 23% of 2007 pretax income,
compared to 36% of 2006 pretax income. The decrease was
principally attributed to the 2007 completion of federal and
state audits noted above, and higher tax-exempt interest.
Liquidity
and capital resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
From 2007
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
to 2008
|
|
|
|
(In thousands)
|
|
|
As of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
505,178
|
|
|
$
|
433,494
|
|
|
$
|
289,913
|
|
|
$
|
71,684
|
|
Working capital
|
|
|
580,237
|
|
|
|
518,408
|
|
|
|
342,062
|
|
|
|
61,829
|
|
Current ratio
|
|
|
13:1
|
|
|
|
14:1
|
|
|
|
8:1
|
|
|
|
|
|
The primary objectives of our investment policy are liquidity
and safety of principal. Consistent with these objectives,
investments are made with the goal of achieving the highest rate
of return. The policy places emphasis on securities of high
credit quality, with restrictions placed on maturities and
concentration by security type and issue.
Our short-term investments include tax advantaged municipal
securities with a minimum Moodys credit rating of A3 and a
minimum Standard & Poors credit rating of A-. As
of December 31, 2008, we did not hold auction rate
securities. Our investment policy limits the effective maturity
on individual securities to six years and an average portfolio
maturity to three years. At December 31, 2008, our
portfolios had an average term of three years and an average
credit quality of AA3 as defined by Moodys.
74
Our working capital at December 31, 2008 increased
$61.8 million from December 31, 2007, primarily due to
increased cash balances generated from operations. Days
sales outstanding, or DSO, for the year ended December 31,
2008 was flat compared to the prior year at 28 days.
Days sales in inventory decreased slightly to
147 days at December 31, 2008 from 153 days at
December 31, 2007 due to increased sales volume and cost of
product sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
From 2007
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
to 2008
|
|
|
|
(In thousands)
|
|
|
Year Ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
178,253
|
|
|
$
|
109,584
|
|
|
$
|
101,020
|
|
|
$
|
68,669
|
|
Investing activities
|
|
|
(139,888
|
)
|
|
|
(183,424
|
)
|
|
|
(79,208
|
)
|
|
|
43,536
|
|
Financing activities
|
|
|
(53,534
|
)
|
|
|
61,812
|
|
|
|
33,153
|
|
|
|
(115,346
|
)
|
Purchases of property, plant and equipment (included in
investing activities above)
|
|
|
(39,348
|
)
|
|
|
(23,096
|
)
|
|
|
(50,760
|
)
|
|
|
(16,252
|
)
|
Our primary source of liquidity has been cash from operations,
which includes the collection of accounts and other receivables
related to product sales, collaborative research agreements, and
royalty and license fees. Our primary short-term cash needs,
which are subject to change, include continued R&D spending
to support new products, costs related to commercialization of
products and purchases of instrument systems, primarily TIGRIS,
for placement with our customers. In addition, we may use cash
to continue the repurchase of our common stock under our stock
repurchase program, as well as for strategic purchases which may
include businesses
and/or
technologies complimentary to our business. Certain R&D
costs may be funded under collaboration agreements with partners.
The $68.7 million increase in net cash provided by
operating activities during 2008 compared to 2007 was primarily
due to $20.8 million in higher net income, a
$23.6 million decrease in accounts receivable due to
collections from our customers and decreases in collaborative
partner funding, a $12.1 million reduction in tax benefits
from stock-based compensation, a $9.0 million increase in
inventories, an $8.5 million decrease in prepaid expenses
related to higher upfront fees paid in 2007 for the purchase of
TIGRIS instruments, a $6.7 million reduction of deferred
revenue related to the termination of our collaboration
agreement with 3M, a $6.2 million increase in accounts
payable balances related to increased cost of sales and timing
of payments, a $4.8 million increase in deferred tax assets
for impairments not yet tax deductible and the excess of current
year stock-based compensation expense over the related tax
deductions, a $3.5 million impairment charge associated
with our Corixa license agreement and a $2.3 million
increase in amortization of premiums on investments.
The $43.5 million decrease in net cash used in investing
activities during 2008 compared to 2007 was principally
attributed to a $16.3 million increase in capital
expenditures and a payment of $10.0 million to Roche
associated with commercialization of our CE-marked HPV product.
These increases were offset by a $65.1 million net decrease
in purchases (net of sales) of short-term investments. Capital
spending increased from 2007 levels due primarily to the
purchase of our blood screening facility, which closed in the
first quarter of 2008.
The $115.3 million decrease in net cash provided by
financing activities during 2008 compared to 2007 was
principally attributed to $75.0 million used in 2008 to
repurchase and retire 1,705,400 shares of our common stock
under our stock repurchase program and a $28.4 million
decrease in proceeds from the exercise of stock options and the
associated $12.1 million decrease in excess tax benefits.
We receive cash from the exercise of employee stock options and
proceeds from the sale of common stock pursuant to the ESPP. We
expect fluctuations to occur throughout the year, as the amount
and frequency of stock-related transactions are dependent upon
the market performance of our common stock, along with other
factors.
We have an unsecured bank line of credit agreement with Wells
Fargo Bank, N.A., which expires in July 2009, under which we may
borrow up to $10.0 million, subject to a borrowing
base formula, at the banks prime rate, or
75
at LIBOR plus 1.0%. At December 31, 2008, we did not have
any amounts outstanding under the bank line and we have not
taken advances against the line since inception.
We believe that our available cash balances, anticipated cash
flows from operations, proceeds from stock option exercises and
available line of credit will be sufficient to satisfy our
operating needs for the foreseeable future. However, we operate
in a rapidly evolving and often unpredictable business
environment that may change the timing or amount of expected
future cash receipts and expenditures. Accordingly, we may in
the future be required to raise additional funds through the
sale of equity or debt securities or from additional credit
facilities. Additional capital, if needed, may not be available
on satisfactory terms, if at all. Further, debt financing may
subject us to covenants restricting our operations.
We may from time to time consider the acquisition of businesses
and/or
technologies complementary to our business. We could require
additional equity or debt financing if we were to engage in a
material acquisition in the future. For example, in January
2009, we made a recommended cash offer to acquire Tepnel for
approximately $132.2 million (based on the exchange rate
described in the offer). Our offer is subject to certain
conditions, including approval of the offer by a majority in
number representing 75% or more in value of Tepnels
shareholders entitled to vote with respect to the proposed
transaction. If we are successful in our acquisition of Tepnel,
we believe the acquisition will provide us access to growth
opportunities in transplant diagnostics, genetic testing and
pharmaceutical services, as well as accelerate our ongoing
strategic efforts to strengthen our marketing and sales,
distribution and manufacturing capabilities in the European
molecular diagnostics market.
Contractual
obligations and commercial commitments
Our contractual obligations due for purchase commitments,
collaborative agreements and minimum royalties as of
December 31, 2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Material purchase
commitments(1)
|
|
$
|
24,822
|
|
|
$
|
24,822
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Collaborative
commitments(2)
|
|
|
5,005
|
|
|
|
1,416
|
|
|
|
1,961
|
|
|
|
250
|
|
|
|
1,378
|
|
Minimum royalty
commitments(3)
|
|
|
1,400
|
|
|
|
175
|
|
|
|
525
|
|
|
|
350
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(4)
|
|
$
|
31,227
|
|
|
$
|
26,413
|
|
|
$
|
2,486
|
|
|
$
|
600
|
|
|
$
|
1,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts represent our minimum purchase commitments from key
vendors for the TIGRIS and Panther instruments, as well as raw
materials used in manufacturing. Of the $24.8 million
total, $15.9 million is expected to be used to purchase
TIGRIS instruments, of which we anticipate that approximately
$7.0 million of instruments will be sold to Novartis. Not
included in the $24.8 million is $9.6 million expected
to be used to purchase validation, pre-production and production
instruments, and associated tooling, pursuant to our development
agreement with Stratec for the Panther instrument and potential
minimum purchase commitments under our supply agreement. Our
obligations under the supply agreement are contingent on
successful completion of all activities under the development
agreement. |
|
(2) |
|
In addition to the minimum payments due under our collaborative
agreements, we may be required to pay up to $12.2 million
in milestone payments, plus royalties on net sales of any
products using specified technology. We may also be required to
pay up to $6.1 million in future development costs in the
form of milestone payments. |
|
(3) |
|
Amounts represent our minimum royalties due on the net sales of
products incorporating licensed technology and subject to a
minimum annual royalty payment. During 2008, we recorded
$5.2 million in royalty costs related to our various
license agreements. |
|
(4) |
|
Does not include amounts relating to our obligations under our
collaboration with Novartis, pursuant to which both parties have
obligations to each other. We are obligated to manufacture and
supply blood screening assays to Novartis, and Novartis is
obligated to purchase all of the assay quantities specified on a
90-day
demand forecast, due 90 days prior to the date Novartis
intends to take delivery, and certain quantities specified on a
rolling
12-month
forecast. |
76
Liabilities associated with uncertain tax positions, currently
estimated at $6.2 million (including interest), are not
included in the table above as we cannot reasonably estimate
when, if ever, an amount would be paid to a government agency.
Ultimate settlement of these liabilities is dependent on factors
outside of our control, such as examinations by each agency and
expiration of statutes of limitation for assessment of
additional taxes.
Additionally, we have liabilities for deferred employee
compensation which totaled $3.7 million at
December 31, 2008. The payments related to the deferred
compensation are not included in the table above because they
are typically dependent upon when certain key employees retire
or otherwise leave the Company. At this time, we cannot
reasonably predict when these events may occur. Liabilities for
deferred employee compensation are offset by deferred
compensation assets, which totaled $3.5 million at
December 31, 2008.
We do not currently have and have never had any relationships
with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special
purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. In addition, we do not
engage in trading activities involving non-exchange traded
contracts. As such, we are not materially exposed to any
financing, liquidity, market or credit risk that could arise if
we had engaged in these relationships.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Our exposure to market risk for changes in interest rates
relates primarily to the increase or decrease in the amount of
interest income we can earn on our investment portfolio. Our
risk associated with fluctuating interest income is limited to
our investments in interest rate sensitive financial
instruments. Under our current policies, we do not use interest
rate derivative instruments to manage this exposure to interest
rate changes. We seek to ensure the safety and preservation of
our invested principal by limiting default risk, market risk,
and reinvestment risk. We mitigate default risk by investing in
short-term investment grade securities. A 100 basis point
increase or decrease in interest rates would increase or
decrease our current investment balance by approximately
$9.0 million. While changes in our interest rates may
affect the fair value of our investment portfolio, any gains or
losses are not recognized in our statement of income until the
investment is sold or if a reduction in fair value is determined
to be a permanent impairment.
Foreign
Currency Exchange Risk
Although the majority of our revenue is realized in United
States dollars, some portions of our revenue are realized in
foreign currencies. As a result, our financial results could be
affected by factors such as changes in foreign currency exchange
rates or weak economic conditions in foreign markets. The
functional currency of our wholly owned subsidiaries Gen-Probe
UK Limited and Molecular Light Technology Limited and its
subsidiaries is the British pound. The functional currency of
Gen-Probe Italia S.r.l. and Gen-Probe Deutschland GmbH is the
Euro. Accordingly, the balance sheet accounts of these
subsidiaries are translated into United States dollars using the
exchange rate in effect at the balance sheet date and revenue
and expenses are translated using the average exchange rates in
effect during the period. The gains and losses from foreign
currency translation of the financial statements of these
subsidiaries are recorded directly as a separate component of
stockholders equity under the caption Accumulated
other comprehensive income.
Our total payables denominated in foreign currencies as of
December 31, 2008 were not material. Our receivables by
foreign currency as of December 31, 2008 reflected in
U.S. dollar equivalents were as follows (in thousands):
|
|
|
|
|
Swiss Franc
|
|
$
|
16
|
|
Canadian dollars
|
|
|
654
|
|
Euro
|
|
|
1,042
|
|
British pounds
|
|
|
1,235
|
|
U.S. dollars
|
|
|
31,150
|
|
|
|
|
|
|
Total gross trade accounts receivable
|
|
$
|
34,097
|
|
|
|
|
|
|
77
Under our collaboration agreement with Novartis, a growing
portion of blood screening product sales is from western
European countries. As a result, our international blood
screening product sales are affected by changes in the foreign
currency exchange rates of those countries where Novartis
business is conducted in Euros or other local currencies.
Beginning in 2009, we began foreign currency hedging
transactions to partially mitigate our exposure to foreign
currency exchange risks. Based on international blood screening
product sales during 2008, a 10% movement of currency exchange
rates would result in a blood screening product sales increase
or decrease of approximately $6.4 million annually.
Similarly, a 10% movement of currency exchange rates would
result in a diagnostic product sales increase or decrease of
approximately $2.2 million annually. Our exposure for both
blood screening and diagnostic product sales is primarily in the
United States dollar versus the Euro, British pound, Australian
dollar, and Canadian dollar. We believe that our business
operations are not significantly exposed to market risk relating
to commodity prices.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Our consolidated financial statements and the Reports of
Ernst & Young LLP, our Independent Registered Public
Accounting Firm, are included in this Annual Report on
Form 10-K
on pages F-1 through F-35.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SECs
rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable and not
absolute assurance of achieving the desired control objectives.
In reaching a reasonable level of assurance, management
necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
In addition, the design of any system of controls also is based
in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions; over time, a control may become inadequate because
of changes in conditions, or the degree of compliance with
policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.
Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures
As of the end of the period covered by this Annual Report on
Form 10-K,
we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures,
as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended. Based on
this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
were effective as of the end of 2008.
Changes
in Internal Control Over Financial Reporting
An evaluation was also performed under the supervision and with
the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of any change in
our internal control over financial reporting that occurred
during our last fiscal quarter and that has materially affected,
or is reasonably likely to materially affect, our internal
control over financial reporting. That evaluation did not
identify any change in our internal control over financial
reporting that occurred during our latest fiscal quarter and
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
78
Managements
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rules 13a-15(f).
All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
as of December 31, 2008 based on the framework in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on our evaluation under the framework
in Internal Control Integrated Framework, our
management concluded that our internal control over financial
reporting was effective as of December 31, 2008.
Ernst & Young LLP, an independent registered public
accounting firm, has issued an attestation report on the
effectiveness of our internal control over financial reporting
as of December 31, 2008. This report, which expressed an
unqualified opinion on the effectiveness of our internal control
over financial reporting as of December 31, 2008, is
included elsewhere herein.
79
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Gen-Probe Incorporated:
We have audited Gen-Probe Incorporateds internal control
over financial reporting as of December 31, 2008, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Gen-Probe
Incorporateds management is responsible for maintaining
effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying
Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the
companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Gen-Probe Incorporated maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2008, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Gen-Probe Incorporated as of
December 31, 2008 and 2007, and the related consolidated
statements of income, cash flows and stockholders equity
for each of the three years in the period ended
December 31, 2008 and our report dated February 17,
2009 expressed an unqualified opinion thereon.
San Diego, California
February 17, 2009
80
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this Item is incorporated in this
report by reference from our Proxy Statement to be filed in
connection with our 2009 Annual Meeting of Stockholders (the
Proxy Statement).
We have adopted a code of ethics for directors, officers
(including our principal executive officer, principal financial
officer and principal accounting officer) and employees, known
as the Code of Ethics. The Code of Ethics is available on our
website at
http://www.gen-probe.com.
Stockholders may request a free copy of the Code of Ethics from:
Gen-Probe Incorporated
Attention: Investor Relations
10210 Genetic Center Drive
San Diego, CA
92121-4362
(858) 410-8000
http://www.gen-probe.com
|
|
Item 11.
|
Executive
Compensation
|
The information required by this Item is incorporated in this
report by reference from our Proxy Statement.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this Item is incorporated in this
report by reference from our Proxy Statement.
Information regarding our equity compensation plans is
incorporated in this report by reference from our Proxy
Statement.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by this Item is incorporated in this
report by reference from our Proxy Statement.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required by this Item is incorporated in this
report by reference from our Proxy Statement.
81
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
(a) Documents filed as part of this report.
1. The following financial statements of Gen-Probe
Incorporated and Report of Ernst & Young LLP,
Independent Registered Public Accounting Firm, are included in
this report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2008 and 2007
Consolidated Statements of Income for each of the three years in
the period ended December 31, 2008
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2008
Consolidated Statements of Stockholders Equity for each of
the three years in the period ended December 31, 2008
Notes to Consolidated Financial Statements
2. Schedule II Valuation and Qualifying
Accounts and Reserves for each of the three years in the period
ended December 31, 2008
Financial Statement schedules. All other schedules are omitted
because they are not applicable or the required information is
shown in the Financial Statements or notes thereto.
3. List of Exhibits required by Item 601 of
Regulation S-K.
(b) Exhibits. See the Exhibit Index and
Exhibits filed as part of this report.
82
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GEN-PROBE INCORPORATED
|
|
|
|
By:
|
/s/ Henry
L. Nordhoff
|
Henry L. Nordhoff
Chairman and Chief Executive Officer
Date: February 25, 2009
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Henry
L. Nordhoff
Henry
L. Nordhoff
|
|
Chairman and Chief Executive Officer (Principal Executive
Officer)
|
|
February 25, 2009
|
|
|
|
|
|
/s/ Herm
Rosenman
Herm
Rosenman
|
|
Senior Vice President Finance and Chief Financial
Officer
(Principal Financial Officer and
Principal Accounting Officer)
|
|
February 25, 2009
|
|
|
|
|
|
/s/ John
W. Brown
John
W. Brown
|
|
Director
|
|
February 25, 2009
|
|
|
|
|
|
/s/ Raymond
V. Dittamore
Raymond
V. Dittamore
|
|
Director
|
|
February 25, 2009
|
|
|
|
|
|
/s/ Armin
M. Kessler
Armin
M. Kessler
|
|
Director
|
|
February 25, 2009
|
|
|
|
|
|
/s/ John
C. Martin
John
C. Martin, Ph.D
|
|
Director
|
|
February 25, 2009
|
|
|
|
|
|
/s/ Phillip
M. Schneider
Phillip
M. Schneider
|
|
Director
|
|
February 25, 2009
|
|
|
|
|
|
/s/ Lucy
Shapiro
Lucy
Shapiro, Ph.D.
|
|
Director
|
|
February 25, 2009
|
|
|
|
|
|
/s/ Abraham
D. Sofaer
Abraham
D. Sofaer
|
|
Director
|
|
February 25, 2009
|
83
GEN-PROBE
INCORPORATED
CONSOLIDATED
FINANCIAL STATEMENTS
CONTENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Gen-Probe Incorporated:
We have audited the accompanying consolidated balance sheets of
Gen-Probe Incorporated as of December 31, 2008 and 2007,
and the related consolidated statements of income, cash flows
and stockholders equity for each of the three years in the
period ended December 31, 2008. Our audits also included
the financial statement schedule listed in the Index at
Item 15(a). These financial statements and schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Gen-Probe Incorporated at
December 31, 2008 and 2007, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2008, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Gen-Probe Incorporateds internal control over financial
reporting as of December 31, 2008, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 17, 2009
expressed an unqualified opinion thereon.
San Diego, California
February 17, 2009
F-2
GEN-PROBE
INCORPORATED
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
60,122
|
|
|
$
|
75,963
|
|
Short-term investments
|
|
|
445,056
|
|
|
|
357,531
|
|
Trade accounts receivable, net of allowance for doubtful
accounts of $700 and $719 at
December 31, 2008 and 2007, respectively
|
|
|
33,397
|
|
|
|
32,678
|
|
Accounts receivable other
|
|
|
2,900
|
|
|
|
11,044
|
|
Inventories
|
|
|
54,406
|
|
|
|
48,540
|
|
Deferred income tax short term
|
|
|
7,269
|
|
|
|
8,825
|
|
Prepaid income tax
|
|
|
2,306
|
|
|
|
2,390
|
|
Prepaid expenses
|
|
|
15,094
|
|
|
|
17,505
|
|
Other current assets
|
|
|
6,135
|
|
|
|
4,402
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
626,685
|
|
|
|
558,878
|
|
Property, plant and equipment, net
|
|
|
141,922
|
|
|
|
129,493
|
|
Capitalized software, net
|
|
|
13,409
|
|
|
|
15,923
|
|
Goodwill
|
|
|
18,621
|
|
|
|
18,621
|
|
Deferred income tax long term
|
|
|
12,286
|
|
|
|
7,942
|
|
License, manufacturing access fees and other assets, net
|
|
|
56,608
|
|
|
|
58,196
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
869,531
|
|
|
$
|
789,053
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
16,050
|
|
|
$
|
11,777
|
|
Accrued salaries and employee benefits
|
|
|
25,093
|
|
|
|
20,997
|
|
Other accrued expenses
|
|
|
4,027
|
|
|
|
4,024
|
|
Income tax payable
|
|
|
|
|
|
|
846
|
|
Deferred revenue short term
|
|
|
1,278
|
|
|
|
2,836
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
46,448
|
|
|
|
40,480
|
|
Non-current income tax payable
|
|
|
4,773
|
|
|
|
3,958
|
|
Deferred income tax long term
|
|
|
55
|
|
|
|
75
|
|
Deferred revenue long term
|
|
|
2,333
|
|
|
|
4,607
|
|
Deferred compensation plan liabilities
|
|
|
2,162
|
|
|
|
1,893
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value per share;
20,000,000 shares authorized, none issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value per share;
200,000,000 shares authorized, 52,920,971 and
53,916,298 shares issued and outstanding at
December 31, 2008 and 2007, respectively
|
|
|
5
|
|
|
|
5
|
|
Additional paid-in capital
|
|
|
382,544
|
|
|
|
415,229
|
|
Accumulated other comprehensive income
|
|
|
3,055
|
|
|
|
1,604
|
|
Retained earnings
|
|
|
428,156
|
|
|
|
321,202
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
813,760
|
|
|
|
738,040
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
869,531
|
|
|
$
|
789,053
|
|
|
|
|
|
|
|
|
|
|
F-3
GEN-PROBE
INCORPORATED
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
429,220
|
|
|
$
|
370,877
|
|
|
$
|
325,307
|
|
Collaborative research revenue
|
|
|
20,581
|
|
|
|
16,619
|
|
|
|
15,937
|
|
Royalty and license revenue
|
|
|
22,894
|
|
|
|
15,518
|
|
|
|
13,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
472,695
|
|
|
|
403,014
|
|
|
|
354,764
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
128,029
|
|
|
|
119,641
|
|
|
|
103,882
|
|
Research and development
|
|
|
101,099
|
|
|
|
97,144
|
|
|
|
84,545
|
|
Marketing and sales
|
|
|
45,850
|
|
|
|
39,928
|
|
|
|
37,096
|
|
General and administrative
|
|
|
52,322
|
|
|
|
47,007
|
|
|
|
44,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
327,300
|
|
|
|
303,720
|
|
|
|
270,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
145,395
|
|
|
|
99,294
|
|
|
|
84,305
|
|
Other income/(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
16,801
|
|
|
|
12,772
|
|
|
|
8,301
|
|
Other income/(expense)
|
|
|
(1,333
|
)
|
|
|
(469
|
)
|
|
|
388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
15,468
|
|
|
|
12,303
|
|
|
|
8,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
|
160,863
|
|
|
|
111,597
|
|
|
|
92,994
|
|
Income tax expense
|
|
|
53,909
|
|
|
|
25,457
|
|
|
|
33,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
106,954
|
|
|
$
|
86,140
|
|
|
$
|
59,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.99
|
|
|
$
|
1.63
|
|
|
$
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.95
|
|
|
$
|
1.58
|
|
|
$
|
1.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
53,708
|
|
|
|
52,975
|
|
|
|
51,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
54,796
|
|
|
|
54,522
|
|
|
|
53,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-4
GEN-PROBE
INCORPORATED
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
106,954
|
|
|
$
|
86,140
|
|
|
$
|
59,498
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
34,715
|
|
|
|
34,159
|
|
|
|
27,496
|
|
Amortization of premiums on investments, net of accretion of
discounts
|
|
|
6,908
|
|
|
|
4,576
|
|
|
|
3,204
|
|
Stock-based compensation charges
|
|
|
20,663
|
|
|
|
19,651
|
|
|
|
23,723
|
|
Stock option income tax benefits
|
|
|
3,276
|
|
|
|
2,596
|
|
|
|
191
|
|
Excess tax benefit from employee stock options
|
|
|
(2,493
|
)
|
|
|
(14,606
|
)
|
|
|
(9,187
|
)
|
Gain on sale of investment in MPI
|
|
|
(1,600
|
)
|
|
|
|
|
|
|
|
|
Loss on property and equipment dispositions and other
|
|
|
55
|
|
|
|
703
|
|
|
|
99
|
|
Impairment of long-lived assets
|
|
|
5,086
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade and other accounts receivable
|
|
|
7,421
|
|
|
|
(16,180
|
)
|
|
|
6,544
|
|
Inventories
|
|
|
(5,367
|
)
|
|
|
3,588
|
|
|
|
(7,798
|
)
|
Prepaid expenses
|
|
|
2,325
|
|
|
|
(6,141
|
)
|
|
|
(595
|
)
|
Other current assets
|
|
|
(1,260
|
)
|
|
|
(2,307
|
)
|
|
|
1,683
|
|
Other long term assets
|
|
|
(173
|
)
|
|
|
(1,131
|
)
|
|
|
(2,147
|
)
|
Accounts payable
|
|
|
4,377
|
|
|
|
(1,818
|
)
|
|
|
(471
|
)
|
Accrued salaries and employee benefits
|
|
|
4,125
|
|
|
|
4,273
|
|
|
|
2,063
|
|
Other accrued expenses
|
|
|
101
|
|
|
|
679
|
|
|
|
(27
|
)
|
Income tax payable
|
|
|
(499
|
)
|
|
|
(397
|
)
|
|
|
9,970
|
|
Deferred revenue
|
|
|
(3,831
|
)
|
|
|
2,855
|
|
|
|
(7,516
|
)
|
Deferred income tax
|
|
|
(2,788
|
)
|
|
|
(7,621
|
)
|
|
|
(6,559
|
)
|
Deferred rent
|
|
|
(10
|
)
|
|
|
(118
|
)
|
|
|
(112
|
)
|
Deferred compensation plan liabilities
|
|
|
268
|
|
|
|
683
|
|
|
|
961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
178,253
|
|
|
|
109,584
|
|
|
|
101,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales and maturities of short-term investments
|
|
|
105,994
|
|
|
|
140,988
|
|
|
|
132,657
|
|
Purchases of short-term investments
|
|
|
(198,691
|
)
|
|
|
(298,824
|
)
|
|
|
(149,012
|
)
|
Purchases of property, plant and equipment
|
|
|
(39,348
|
)
|
|
|
(23,096
|
)
|
|
|
(50,760
|
)
|
Purchase of intangible assets, including license and
manufacturing access fees
|
|
|
(11,970
|
)
|
|
|
(2,213
|
)
|
|
|
(11,460
|
)
|
Proceeds from sale of investment in MPI
|
|
|
4,100
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
27
|
|
|
|
(279
|
)
|
|
|
(633
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(139,888
|
)
|
|
|
(183,424
|
)
|
|
|
(79,208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess tax benefit from employee stock options
|
|
|
2,493
|
|
|
|
14,606
|
|
|
|
9,187
|
|
Repurchase and retirement of restricted stock for payment of
taxes
|
|
|
(1,529
|
)
|
|
|
(1,474
|
)
|
|
|
(429
|
)
|
Repurchases of common stock
|
|
|
(74,970
|
)
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
20,472
|
|
|
|
48,680
|
|
|
|
24,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) / provided by financing activities
|
|
|
(53,534
|
)
|
|
|
61,812
|
|
|
|
33,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(672
|
)
|
|
|
86
|
|
|
|
612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(15,841
|
)
|
|
|
(11,942
|
)
|
|
|
55,577
|
|
Cash and cash equivalents at the beginning of year
|
|
|
75,963
|
|
|
|
87,905
|
|
|
|
32,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of year
|
|
$
|
60,122
|
|
|
$
|
75,963
|
|
|
$
|
87,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes
|
|
$
|
54,783
|
|
|
$
|
32,208
|
|
|
$
|
29,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-5
GEN-PROBE
INCORPORATED
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Deferred
|
|
|
(Loss)
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income
|
|
|
Earnings
|
|
|
Equity
|
|
|
Balance at December 31, 2005
|
|
|
51,138
|
|
|
$
|
5
|
|
|
$
|
281,907
|
|
|
$
|
(5,951
|
)
|
|
$
|
(1,231
|
)
|
|
$
|
172,643
|
|
|
$
|
447,373
|
|
Deferred compensation related to adoption of
SFAS No. 123(R)
|
|
|
|
|
|
|
|
|
|
|
(5,951
|
)
|
|
|
5,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect adjustment, net of income taxes of $2,583,
upon adoption of SAB No. 108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,883
|
|
|
|
3,883
|
|
Common shares issued from exercise of stock options
|
|
|
913
|
|
|
|
|
|
|
|
20,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,909
|
|
Purchase of common shares through employee stock purchase plan
|
|
|
81
|
|
|
|
|
|
|
|
3,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,486
|
|
Purchase of common shares by board members
|
|
|
3
|
|
|
|
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139
|
|
Issuance of restricted stock awards
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of restricted stock awards
|
|
|
(15
|
)
|
|
|
|
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59
|
)
|
Repurchase and retirement of restricted stock for employee taxes
|
|
|
(9
|
)
|
|
|
|
|
|
|
(429
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(429
|
)
|
Stock-based compensation expense restricted stock
|
|
|
|
|
|
|
|
|
|
|
2,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,382
|
|
Stock-based compensation expense all other
|
|
|
|
|
|
|
|
|
|
|
21,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,261
|
|
Stock-based compensation, net capitalized to inventory
|
|
|
|
|
|
|
|
|
|
|
1,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,161
|
|
Stock option income tax benefits
|
|
|
|
|
|
|
|
|
|
|
9,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,378
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,498
|
|
|
|
59,498
|
|
Unrealized gains on short-term investments, net of income taxes
of $111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251
|
|
|
|
|
|
|
|
251
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
975
|
|
|
|
|
|
|
|
975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
52,234
|
|
|
$
|
5
|
|
|
$
|
334,184
|
|
|
$
|
|
|
|
$
|
(5
|
)
|
|
$
|
236,024
|
|
|
$
|
570,208
|
|
Cumulative effect adjustment upon the adoption of
FIN No. 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(962
|
)
|
|
|
(962
|
)
|
Common shares issued from exercise of stock options
|
|
|
1,539
|
|
|
|
|
|
|
|
45,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,129
|
|
Purchase of common shares through employee stock purchase plan
|
|
|
74
|
|
|
|
|
|
|
|
3,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,550
|
|
Purchase of common shares by board members
|
|
|
2
|
|
|
|
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128
|
|
Issuance of restricted stock awards
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of deferred issuance restricted stock awards
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of restricted stock awards
|
|
|
(61
|
)
|
|
|
|
|
|
|
(349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(349
|
)
|
Repurchase and retirement of restricted shares for employee taxes
|
|
|
(24
|
)
|
|
|
|
|
|
|
(1,474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,474
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
19,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,455
|
|
Stock option income tax benefits
|
|
|
|
|
|
|
|
|
|
|
14,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,606
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,140
|
|
|
|
86,140
|
|
Unrealized gains on short-term investments, net of income taxes
of $1,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,175
|
|
|
|
|
|
|
|
2,175
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(566
|
)
|
|
|
|
|
|
|
(566
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
53,916
|
|
|
$
|
5
|
|
|
$
|
415,229
|
|
|
$
|
|
|
|
$
|
1,604
|
|
|
$
|
321,202
|
|
|
$
|
738,040
|
|
Common shares issued from exercise of stock options
|
|
|
525
|
|
|
|
|
|
|
|
16,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,771
|
|
Repurchase and retirement of common shares
|
|
|
(1,705
|
)
|
|
|
|
|
|
|
(74,970
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74,970
|
)
|
Purchase of common shares through employee stock purchase plan
|
|
|
98
|
|
|
|
|
|
|
|
3,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,701
|
|
Purchase of common shares by board members
|
|
|
3
|
|
|
|
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148
|
|
Issuance of restricted stock awards
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of deferred issuance restricted stock awards
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of restricted stock awards
|
|
|
(32
|
)
|
|
|
|
|
|
|
(297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(297
|
)
|
Cancellation and retirement of restricted shares for employee
taxes
|
|
|
(27
|
)
|
|
|
|
|
|
|
(1,529
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,529
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
20,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,998
|
|
Stock option income tax benefits
|
|
|
|
|
|
|
|
|
|
|
2,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,493
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106,954
|
|
|
|
106,954
|
|
Unrealized gains on short-term investments, net of income tax
benefits of $935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,735
|
|
|
|
|
|
|
|
1,735
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(284
|
)
|
|
|
|
|
|
|
(284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
52,921
|
|
|
$
|
5
|
|
|
$
|
382,544
|
|
|
$
|
|
|
|
$
|
3,055
|
|
|
$
|
428,156
|
|
|
$
|
813,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-6
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
Note 1
|
Organization
and summary of significant accounting policies
|
Organization
and basis of presentation
Gen-Probe Incorporated (Gen-Probe or the
Company) is engaged in the development, manufacture
and marketing of rapid, accurate and cost-effective nucleic acid
probe-based products used for the clinical diagnosis of human
diseases and for screening donated human blood. The Company also
develops and manufactures nucleic acid probe-based products for
the detection of harmful organisms in the environment and in
industrial processes. The Company has 26 years of research
and development experience in nucleic acid detection, and its
products, which are based on the Companys patented nucleic
acid testing (NAT) technologies, are used daily in
clinical laboratories and blood collection centers throughout
the world.
Principles
of consolidation
The consolidated financial statements of the Company include the
accounts of the Company and its subsidiaries, Gen-Probe
Sales & Service, Inc., Gen-Probe International, Inc.,
Gen-Probe UK Limited (GP UK Limited), Gen-Probe
Italia S.r.l., Gen-Probe Deutschland GmbH and Molecular Light
Technology Limited (MLT) and MLTs
subsidiaries. All intercompany transactions and balances have
been eliminated in consolidation.
Use of
estimates
The preparation of financial statements in conformity with
United States generally accepted accounting principles
(U.S. GAAP) requires management to make
estimates and assumptions that affect the amounts reported in
the consolidated financial statements. These estimates include
assessing the collectability of accounts receivable, the
valuation of stock-based compensation, recognition of revenues,
the valuation of inventories and long-lived assets, including
patent costs, capitalized software and license and manufacturing
access fees, equity investments in privately held companies,
income tax, and liabilities associated with employee benefit
costs. Actual results could differ from those estimates.
Foreign
currencies
The functional currency for the Companys wholly owned
subsidiaries GP UK Limited and MLT and its subsidiaries is the
British pound. The functional currency of Gen-Probe Italia SRL
and Gen-Probe Deutschland GmbH is the Euro. Accordingly, balance
sheet accounts of these subsidiaries are translated into United
States dollars using the exchange rate in effect at the balance
sheet date, and revenues and expenses are translated using the
average exchange rates in effect during the period. The gains
and losses from foreign currency translation of the financial
statements of these subsidiaries are recorded directly as a
separate component of stockholders equity under the
caption Accumulated other comprehensive income.
Cash
and cash equivalents
Cash and cash equivalents consist primarily of highly liquid
cash investment funds with original maturities of three months
or less when acquired.
Short-term
investments
Short-term investments are carried at fair value, with
unrealized gains and losses, net of tax, reported as a separate
component of stockholders equity under the caption
Accumulated other comprehensive income. The
amortized cost of debt securities is adjusted for amortization
of premiums and accretion of discounts to maturity. Such
amortization is included in Interest income.
F-7
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Realized gains and losses, and declines in value judged to be
other-than-temporary on short-term investments, are included in
Interest income. The cost of securities sold is
based on the specific identification method. Interest and
dividends on securities classified as available-for-sale are
included in Interest income.
Segment
information
The Company identifies its operating segments based on business
activities, management responsibility and geographical location.
For all periods presented, the Company operated in a single
business segment. Revenue by geographic location is presented in
Note 12.
Concentration
of credit risk
The Company sells its diagnostic products primarily to
established large reference laboratories, public health
institutions and hospitals. Credit is extended based on an
evaluation of the customers financial condition and
generally collateral is not required.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash
equivalents, and short-term investments. The Company limits its
exposure to credit loss by placing its cash with high credit
quality financial institutions. The Company generally invests
its excess cash in investment grade municipal securities. The
Companys short-term investments are detailed in
Note 4.
Fair
value of financial instruments
The carrying value of cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued liabilities
approximates fair value. See Note 5 for further discussion
of fair value.
Accounts
receivable
Accounts receivable are recorded at the invoiced amount and are
non-interest bearing. The Company maintains an allowance for
doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. Credit
losses historically have been minimal and within
managements expectations. If the financial condition of
the Companys customers were to deteriorate, resulting in
an impairment of the customers ability to make payments,
additional allowances would be required.
Stock-based
compensation
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 123(R), Share-Based
Payment, stock-based compensation cost is measured at the
grant date, based on the estimated fair value of the award, and
is recognized as expense over the employees requisite
service period. The Company has no awards with market or
performance conditions. Stock-based compensation expense
recognized is based on the value of share-based payment awards
that are ultimately expected to vest, which coincides with the
award holders requisite service period. Certain of these
costs are capitalized into inventory on the Companys
balance sheet, and are recognized as an expense when the related
products are sold.
Net
income per share
The Company computes net income per share in accordance with
SFAS No. 128, Earnings Per Share, and
SFAS No. 123(R). Basic net income per share is
computed by dividing the net income for the period by the
weighted average number of common shares outstanding during the
period. Diluted net income per share is computed by dividing the
net income for the period by the weighted average number of
common and common equivalent shares outstanding during the
period. The Company excludes stock options when the combined
exercise price, average unamortized fair values and assumed tax
benefits upon exercise, are greater than the average market
price for the Companys common stock from the calculation
of diluted net income per share because their effect is
anti-dilutive.
F-8
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the computation of net income per
share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net income
|
|
$
|
106,954
|
|
|
$
|
86,140
|
|
|
$
|
59,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding Basic
|
|
|
53,708
|
|
|
|
52,975
|
|
|
|
51,538
|
|
Effect of dilutive common stock options outstanding
|
|
|
1,088
|
|
|
|
1,547
|
|
|
|
1,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding Diluted
|
|
|
54,796
|
|
|
|
54,522
|
|
|
|
53,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.99
|
|
|
$
|
1.63
|
|
|
$
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.95
|
|
|
$
|
1.58
|
|
|
$
|
1.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive securities include stock options and restricted stock
subject to vesting. Potentially dilutive securities totaling
approximately 2,448,000, 1,556,000, and 1,339,000 for the years
ended December 31, 2008, 2007 and 2006, respectively, were
excluded from the calculation of diluted earnings per share
because of their anti-dilutive effect.
Revenue
recognition
The Company records shipments of its clinical diagnostic
products as product sales when the product is shipped and title
and risk of loss has passed and when collection of the resulting
receivable is reasonably assured.
The Company manufactures blood screening products according to
demand specifications of its collaboration partner, Novartis.
Upon shipment to Novartis, the Company recognizes blood
screening product sales at an agreed upon transfer price and
records the related cost of products sold. Based on the terms of
the Companys collaboration agreement with Novartis, the
Companys ultimate share of the net revenue from sales to
the end user is not known until reported to the Company by
Novartis. The Company then adjusts blood screening product sales
upon receipt of customer revenue reports and a net payment from
Novartis of amounts reflecting its ultimate share of net sales
by Novartis of these products, less the transfer price revenues
previously recognized.
Product sales also include the sales or rental revenue
associated with the delivery of the Companys proprietary
integrated instrument platforms that perform its diagnostic
assays. Generally, the Company provides its instrumentation to
clinical laboratories and hospitals without requiring them to
purchase the equipment or enter into an equipment lease.
Instead, the Company recovers the cost of providing the
instrumentation in the amount it charges for its diagnostic
assays. The depreciation costs associated with an instrument are
charged to cost of product sales on a straight-line basis over
the estimated life of the instrument. The costs to maintain
these instruments in the field are charged to cost of product
sales as incurred.
The Company sells its instruments to Novartis for use in blood
screening and records these instrument sales upon delivery since
Novartis is responsible for the placement, maintenance and
repair of the units with its customers. The Company also sells
instruments to its clinical diagnostics customers and records
sales of these instruments upon delivery and receipt of customer
acceptance. Prior to delivery, each instrument is tested to meet
Company and Food and Drug Administration (FDA)
specifications, and is shipped fully assembled. Customer
acceptance of the Companys clinical diagnostic instrument
systems requires installation and training by the Companys
technical service personnel. Generally, installation is a
standard process consisting principally of uncrating,
calibrating, and testing the instrumentation.
F-9
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company records as collaborative research revenue shipments
of its blood screening products in the United States and other
countries in which the products have not received regulatory
approval. This is done because price restrictions apply to these
products prior to FDA marketing approval in the United States
and similar approvals in foreign countries. Upon shipment of
FDA-approved and labeled products following commercial approval,
the Company classifies sales of these products as product sales
in its consolidated financial statements.
The Company follows the provisions of Emerging Issues Task Force
(EITF) Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables, for
multiple element revenue arrangements. EITF Issue
No. 00-21
provides guidance on how to determine when an arrangement that
involves multiple revenue-generating activities or deliverables
should be divided into separate units of accounting for revenue
recognition purposes, and if this division is required, how the
arrangement consideration should be allocated among the separate
units of accounting. If the deliverables in a revenue
arrangement constitute separate units of accounting according to
the EITF Issue
No. 00-21
separation criteria, the revenue-recognition policy must be
determined for each identified unit. If the arrangement is a
single unit of accounting, the revenue-recognition policy must
be determined for the entire arrangement, and all non-refundable
upfront license fees are deferred and recognized as revenues on
a straight-line basis over the expected term of the
Companys continued involvement in the collaborations.
The Company recognizes collaborative research revenue over the
term of various collaboration agreements, as negotiated monthly
contracted amounts are earned or reimbursable costs are incurred
related to those agreements. Negotiated monthly contracted
amounts are earned in relative proportion to the performance
required under the contracts. Non-refundable license fees are
recognized over the related performance period or at the time
that the Company has satisfied all performance obligations.
Milestone payments are recognized as revenue upon the
achievement of specified milestones when (i) the Company
has earned the milestone payment, (ii) the milestone is
substantive in nature and the achievement of the milestone is
not reasonably assured at the inception of the agreement,
(iii) the fees are non-refundable, and
(iv) performance obligations after the milestone
achievement will continue to be funded by the collaborator at a
level comparable to the level before the milestone achievement.
Any amounts received prior to satisfying the Companys
revenue recognition criteria are recorded as deferred revenue on
the consolidated balance sheet.
Royalty revenue is recognized related to the sale or use of the
Companys products or technologies under license agreements
with third parties. For those arrangements where royalties are
reasonably estimable, the Company recognizes revenue based on
estimates of royalties earned during the applicable period and
adjusts for differences between the estimated and actual
royalties in the following period. Historically, these
adjustments have not been material. For those arrangements where
royalties are not reasonably estimable, the Company recognizes
revenue upon receipt of royalty statements from the applicable
licensee. Non-refundable license fees are recognized over the
related performance period or at the time the Company has
satisfied all performance obligations.
Cost
of revenues
Cost of product sales reflects the costs applicable to products
shipped for which product sales revenue is recognized in
accordance with the Companys revenue recognition policy.
The Company manufactures products for commercial sale as well as
development stage products for internal use or clinical
evaluation. The Company follows SFAS No. 2,
Accounting for Research and Development Costs, in
classifying costs between cost of product sales and research and
development costs.
The Company does not separately track all of the costs
applicable to collaborative research revenue, as there is not a
distinction between the Companys internal development
activities and the development efforts made pursuant to
agreements with third parties. The costs associated with
collaborative research revenue are based on fully burdened full
time equivalent rates and are reflected in the Companys
consolidated statements of income under the captions
Research and development, Marketing and
sales, and General and administrative, based
on the nature of the costs.
F-10
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Shipping
and handling expenses
Shipping and handling expenses included in cost of product sales
totaled approximately $6,721,000, $5,607,000, and $4,951,000 for
the years ended December 31, 2008, 2007 and 2006,
respectively.
Contingencies
Contingent gains are not recorded in the Companys
consolidated financial statements since this accounting
treatment could result in the recognition of gains that might
never be realized. Contingent losses are only recorded in the
Companys consolidated financial statements if it is
probable that a loss will result from a contingency and the
amount can be reasonably estimated.
Inventories
Inventories are stated at the lower of cost or market. Cost,
which includes amounts related to materials and labor and
overhead, is determined in a manner which approximates the
first-in,
first-out method. The estimated reserve is based on
managements review of inventories on hand, compared to
estimated future usage and sales, shelf-life and assumptions
about the likelihood of obsolescence.
Patent
costs
The Company capitalizes the costs incurred to file and prosecute
patent applications. The Company amortizes these costs on a
straight-line basis over the lesser of the remaining useful life
of the related technology or eight years. Capitalized patent
costs are included in License, manufacturing access fees
and other assets, net on the consolidated balance sheets.
All costs related to abandoned patent applications are recorded
as General and administrative expenses.
Capitalized
software costs
The Company capitalizes costs incurred in the development of
computer software related to products under development after
establishment of technological feasibility in accordance with
SFAS No. 86, Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise
Marketed. These capitalized costs are recorded at the
lower of unamortized cost or net realizable value and are
amortized over the estimated life of the related product or ten
years.
Long-lived
assets
Property, plant and equipment and intangible assets with
definite useful lives are stated at cost. Depreciation of
property, plant and equipment and intangible assets is provided
using the straight-line method over the estimated useful lives
of the assets as follows:
|
|
|
|
|
|
|
Years
|
|
|
Building
|
|
|
10-39
|
|
Machinery and equipment
|
|
|
3-8
|
|
Furniture and fixtures
|
|
|
3
|
|
Depreciation expense was $26,528,000, $26,592,000, and
$21,190,000 for the years ended December 31, 2008, 2007 and
2006, respectively. Amortization of building improvements is
provided over the shorter of the remaining life of the lease or
estimated useful life of the asset. The costs of purchased
intangibles are amortized over their estimated useful lives. See
Note 6 for further details of the Companys intangible
assets and related amortization expense.
F-11
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Intangible
assets
The Company capitalizes license fee payments that relate to
acquired intangibles with alternative future uses in accordance
with SFAS No. 2 and SFAS No. 142,
Goodwill and Other Intangible Assets.
Consistent with Statement of Financial Accounting Concepts
No. 6, Elements of Financial Statements, the
Company capitalizes manufacturing access fees that it pays when
(i) the fee embodies a probable future benefit that
involves a capacity, singly or in combination with other assets,
to contribute directly or indirectly to future net cash inflows,
(ii) the Company can obtain the benefit and control
others access to it, and (iii) the transaction or
other event giving rise to the entitys right to or control
of the benefit has already occurred.
In accordance with SFAS No. 142, intangible assets
that the Company acquires are initially recognized and measured
based on their fair value. The Company uses the present value
technique of estimated future cash flows to measure the fair
value of assets at the date of acquisition. Those cash flow
estimates incorporate assumptions based on historical experience
with selling similar products in the marketplace. In accordance
with SFAS No. 142, the useful life of an intangible
asset to an entity is the period over which the asset is
expected to contribute directly or indirectly to the future cash
flows of that entity. The Company amortizes the capitalized
intangible assets over the remaining economic life of the
relevant technology using the straight-line method, which
currently ranges from 1 to 20 years.
Impairment
of long-lived assets
In accordance with SFAS No. 142, the Company does not
amortize its goodwill and intangible assets with indefinite
useful lives. SFAS No. 142 requires that these assets
be reviewed for impairment at least annually. The Company
completed its impairment test in the fourth quarter of 2008 and
determined that no impairment loss was necessary. If the assets
were considered to be impaired, the impairment charge would be
the amount by which the carrying value of the assets exceeds the
fair value of the assets.
In accordance with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets,
periodically and whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable, the Company performs an impairment analysis to
determine if it expects to recover the costs through the
subsequent sales of applicable products. If impairment is
indicated, the Company measures the amount of such impairment by
comparing the fair value to the carrying value.
During the year ended December 31, 2008, due to certain
indicators of impairment, the Company recorded impairment
charges totaling $5,086,000 related to its equity investment in
Qualigen, Inc. and its license agreement with Corixa
Corporation. Please see Notes 5 and 6, respectively, for a
complete discussion of the impairment analysis.
Self-insurance
reserves
The Companys consolidated balance sheets at
December 31, 2008 and 2007 include approximately $1,858,000
and $1,965,000, respectively, of liabilities associated with
employee benefit costs that are retained by the Company,
including medical costs and workers compensation claims.
The Company estimates the required liability of such claims on
an undiscounted basis based upon various assumptions which
include, but are not limited to, the Companys historical
loss experience and projected loss development factors. The
required liability is also subject to adjustment in the future
based upon changes in claims experience, including changes in
the number of incidents (frequency) and change in the ultimate
cost per incident (severity).
Accumulated
other comprehensive income
In accordance with SFAS No. 130, Reporting
Comprehensive Income, all components of comprehensive
income, including net income, are reported in the financial
statements in the period in which they are recognized.
F-12
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Comprehensive income is defined as the change in equity during a
period from transactions and other events and circumstances from
non-owner sources. Net income and other comprehensive income,
which includes certain changes in stockholders equity such
as foreign currency translation of the Companys wholly
owned subsidiaries financial statements and unrealized
gains and losses on its available-for-sale securities, are
reported, net of their related tax effect, to arrive at
comprehensive income.
Research
and development
Research and development (R&D) costs are
accounted for in accordance with SFAS No. 2.
Income
tax
The asset and liability approach is used to recognize deferred
tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. The impact
of tax law and rate changes is reflected in income in the period
such changes are enacted. As needed, the Company records a
valuation allowance to reduce the deferred tax assets to the
amount that is more likely than not to be realized based on
expected future taxable income.
The Companys income tax returns are based on calculations
and assumptions that are subject to examination by various tax
authorities. While the Company believes it has appropriate
support for the positions taken on its tax returns, the Company
regularly assesses the potential outcomes of these examinations
and any future examinations in determining the adequacy of its
provision for income taxes. As part of its assessment of
potential adjustments to its tax returns, the Company increases
its current tax liability to the extent an adjustment would
result in a cash tax payment or decreases its deferred tax
assets to the extent an adjustment would not result in a cash
tax payment. The Company reviews, at least quarterly, the
likelihood and amount of potential adjustments and adjusts the
income tax provision, the current tax liability and deferred
taxes in the period in which the facts that give rise to a
revision become probable and estimable.
Adoption
of recent accounting pronouncements
SFAS No. 157
In September 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 157, Fair
Value Measurements. SFAS No. 157 provides
guidance for using fair value to measure assets and liabilities.
It also responds to investors requests for expanded
information about the extent to which companies measure assets
and liabilities at fair value, the information used to measure
fair value, and the effect of fair valued measurements on
earnings. SFAS No. 157 applies whenever standards
require (or permit) assets or liabilities to be measured at fair
value, and does not expand the use of fair value in any new
circumstances. SFAS No. 157 is effective for financial
assets and liabilities in financial statements issued for the
Companys fiscal year beginning January 1, 2008. There
was no material financial statement impact as a result of
adoption.
In accordance with the guidance of FASB Staff Position
(FSP)
No. 157-2,
Effective Date of FASB Statement No. 157, the
Company has postponed adoption of the standard for non-financial
assets and liabilities that are measured at fair value on a
non-recurring basis, until the fiscal year beginning
January 1, 2009. The Company does not anticipate adoption
will have a material impact on its consolidated financial
position, results of operations or liquidity.
In October 2008, the FASB issued FSP
No. 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active. FSP
No. 157-3
clarifies the application of SFAS No. 157 in a market
that is not active, and is effective as of the issue date,
including application to prior periods for which financial
statements have not been issued. The Company adopted this
statement effective October 10, 2008. There was no material
financial statement impact as a result of adoption. See
Note 5 for more information.
F-13
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SFAS No. 159
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115. SFAS No. 159 expands the use of
fair value accounting but does not affect existing standards
that require assets or liabilities to be carried at fair value.
Under SFAS No. 159, a company may elect to use fair
value to measure accounts and loans receivable,
available-for-sale and held-to-maturity securities, equity
method investments, accounts payable, guarantees and issued
debt. Other eligible items include firm commitments for
financial instruments that otherwise would not be recognized at
inception and non-cash warranty obligations where a warrantor is
permitted to pay a third party to provide the warranty goods or
services. If the use of fair value is elected, any upfront costs
and fees related to the item must be recognized in earnings and
cannot be deferred (e.g., debt issue costs). The fair value
election is irrevocable and generally made on an
instrument-by-instrument
basis, even if a company has similar instruments that it elects
not to measure based on fair value. At the adoption date,
unrealized gains and losses on existing items for which fair
value has been elected are reported as a cumulative adjustment
to beginning retained earnings. Subsequent to the adoption of
SFAS No. 159, changes in fair value are recognized in
earnings. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007.
The Company adopted this statement effective January 1,
2008. During 2008, the Company did not elect fair value as an
alternative measurement for any financial instruments not
previously carried at fair value.
EITF
Issue
No. 07-3
In June 2007, the FASB ratified EITF Issue
No. 07-3,
Accounting for Non-Refundable Payments for Goods or
Services Received for Use in Future Research and Development
Activities. EITF Issue
No. 07-3
requires that non-refundable advance payments for goods or
services that will be used or rendered for future research and
development activities be deferred and capitalized and
recognized as an expense as the goods are delivered or the
related services are performed. EITF Issue
No. 07-3
is effective, on a prospective basis, for fiscal years beginning
after December 15, 2007.
The Company adopted this statement effective January 1,
2008. There was no material financial statement impact as a
result of adoption.
Pending
adoption of recent accounting pronouncements
SFAS No. 141(R)
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations. SFAS No. 141(R)
changes the requirements for an acquirers recognition and
measurement of the assets acquired and liabilities assumed in a
business combination, including the treatment of contingent
consideration, pre-acquisition contingencies, transaction costs,
in-process research and development and restructuring costs. In
addition, under SFAS No. 141(R), changes in an
acquired entitys deferred tax assets and uncertain tax
positions after the measurement period will impact income tax
expense. This statement is effective with respect to business
combination transactions for which the acquisition date is after
December 31, 2008.
SFAS No. 160
In December 2007, the FASB issued SFAS No. 160,
Non-controlling Interests in Consolidated Financial
Statements (an amendment of Accounting Research
Bulletin No. 51). SFAS No. 160
requires that non-controlling (minority) interests be reported
as a component of equity, that net income attributable to the
parent and to the non-controlling interest be separately
identified in the income statement, that changes in a
parents ownership interest while the parent retains its
controlling interest be accounted for as equity transactions,
and that any retained non-controlling equity investment upon the
deconsolidation of a subsidiary be initially measured at fair
value. This statement is effective for fiscal years beginning
after December 31, 2008, and shall be applied
prospectively.
F-14
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
However, the presentation and disclosure requirements of
SFAS No. 160 are required to be applied
retrospectively for all periods presented. The retrospective
presentation and disclosure requirements of this statement will
be applied to any prior periods presented in financial
statements for the fiscal year ending December 31, 2009,
and later periods during which we have a consolidated subsidiary
with a non-controlling interest. As of December 31, 2008,
the Company does not have any consolidated subsidiaries in which
there is a non-controlling interest.
EITF
Issue
No. 07-1
In November 2007, the FASB ratified EITF Issue
No. 07-1,
Accounting for Collaborative Agreements Related to the
Development and Commercialization of Intellectual
Property. EITF Issue
No. 07-1
defines collaborative agreements as a contractual arrangement in
which the parties are active participants to the arrangement and
are exposed to the significant risks and rewards that are
dependent on the ultimate commercial success of the endeavor.
Additionally, it requires that revenue generated and costs
incurred on sales to third parties as it relates to a
collaborative agreement be recognized as gross or net based on
EITF Issue
No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an
Agent. Essentially, this requires the party that is
identified as the principal participant in a transaction to
record the transaction on a gross basis in its financial
statements. It also requires payments between participants to be
accounted for in accordance with already existing generally
accepted accounting principles, unless none exist, in which case
a reasonable, rational, consistent method should be used. The
Company will adopt this guidance effective January 1, 2009
for all collaboration agreements existing as of that date. The
Company does not believe adoption will have a material impact on
its financial statements, as it believes all agreements are
currently in compliance with this standard.
|
|
Note 2
|
Stock-based
compensation
|
In accordance with SFAS No. 123(R), Share-Based
Payment, stock-based compensation expense is measured at
the grant date, based on the estimated fair value of the award,
and is recognized as expense over the employees requisite
service period. The Company has no awards with market or
performance conditions. Stock-based compensation expense
recognized is based on the value of share-based payment awards
that are ultimately expected to vest, which coincides with the
award holders requisite service period. A portion of these
costs are capitalized into inventory on the Companys
balance sheet, and are recognized as an expense when the related
products are sold.
The Company uses the Black-Scholes-Merton option pricing model
to value options granted. The determination of fair value of
share-based payment awards on the date of grant using the
Black-Scholes-Merton model is affected by the Companys
stock price and the implied volatility on its traded options, as
well as the input of other subjective assumptions. These
assumptions include, but are not limited to, the expected term
of stock options and the Companys expected stock price
volatility over the term of the awards.
The Company used the following weighted average assumptions
(annualized percentages) to estimate the fair value of options
granted and the shares purchasable under the Companys
stock option plans and Employee Stock Purchase Plan
(ESPP):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option Plans
|
|
|
ESPP
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Risk-free interest rate
|
|
|
3.0
|
%
|
|
|
4.6
|
%
|
|
|
4.8
|
%
|
|
|
3.3
|
%
|
|
|
5.0
|
%
|
|
|
4.4
|
%
|
Volatility
|
|
|
34
|
%
|
|
|
36
|
%
|
|
|
42
|
%
|
|
|
34
|
%
|
|
|
29
|
%
|
|
|
40
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term (years)
|
|
|
4.2
|
|
|
|
4.2
|
|
|
|
4.5
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
0.5
|
|
Resulting average fair value
|
|
$
|
18.36
|
|
|
$
|
21.44
|
|
|
$
|
20.75
|
|
|
$
|
13.31
|
|
|
$
|
12.88
|
|
|
$
|
12.76
|
|
F-15
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The risk-free interest rate assumption is based upon observed
interest rates appropriate for the terms of the Companys
employee stock options. The Company uses a blend of historical
and implied volatility for the expected volatility assumption.
The selection of a blend of historical and implied volatility
data to estimate expected volatility was based upon the
availability of actively traded options on the Companys
stock and the Companys assessment that a blend is more
representative of future stock price trends than either one
individually. The Company historically has not made dividend
payments, but is required to assume a dividend yield as an input
to the Black-Scholes-Merton model. The dividend yield is based
on the Companys expectation of future dividend payouts.
The expected term of employee stock options represents the
weighted-average period the stock options are expected to remain
outstanding. The Company uses a midpoint scenario method, which
assumes that all vested, outstanding options are settled halfway
between the date of measurement and their expiration date. The
calculation also leverages the history of actual exercises and
post-vesting cancellations. SFAS No. 123(R) requires
forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ
from those estimates. The Company assesses the forfeiture rate
on a quarterly basis and revises the rate when deemed necessary.
The Companys unrecognized stock-based compensation
expense, before income taxes and adjusted for estimated
forfeitures, related to outstanding unvested share-based payment
awards was approximately as follows (in thousands, except number
of years):
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Unrecognized
|
|
|
|
Remaining
|
|
|
Expense as of
|
|
|
|
Expense
|
|
|
December 31,
|
|
Awards
|
|
Life (Years)
|
|
|
2008
|
|
|
Options
|
|
|
1.4
|
|
|
$
|
37,381
|
|
ESPP
|
|
|
0.2
|
|
|
|
91
|
|
Restricted Stock
|
|
|
1.9
|
|
|
|
12,798
|
|
Deferred Issuance Restricted Stock
|
|
|
1.5
|
|
|
|
2,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
52,619
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the stock-based compensation
expense that the Company recorded in its consolidated statements
of income in accordance with SFAS No. 123(R) (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cost of product sales
|
|
$
|
2,495
|
|
|
$
|
3,144
|
|
|
$
|
2,337
|
|
Research and development
|
|
|
6,101
|
|
|
|
5,020
|
|
|
|
8,048
|
|
Marketing and sales
|
|
|
2,854
|
|
|
|
2,404
|
|
|
|
2,905
|
|
General and administrative
|
|
|
9,213
|
|
|
|
9,083
|
|
|
|
10,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,663
|
|
|
$
|
19,651
|
|
|
$
|
23,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 3
|
Balance
sheet information
|
The following tables provide details of selected balance sheet
items (in thousands):
Inventories
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Raw materials and supplies
|
|
$
|
8,529
|
|
|
$
|
7,774
|
|
Work in process
|
|
|
24,945
|
|
|
|
23,829
|
|
Finished goods
|
|
|
20,932
|
|
|
|
16,937
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
54,406
|
|
|
$
|
48,540
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Land
|
|
$
|
18,804
|
|
|
$
|
13,862
|
|
Building
|
|
|
80,426
|
|
|
|
69,946
|
|
Machinery and equipment
|
|
|
153,211
|
|
|
|
139,871
|
|
Building improvements
|
|
|
34,592
|
|
|
|
32,614
|
|
Furniture and fixtures
|
|
|
16,270
|
|
|
|
16,146
|
|
Construction in-progress
|
|
|
19
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment (at cost)
|
|
|
303,322
|
|
|
|
272,620
|
|
Less accumulated depreciation and amortization
|
|
|
(161,400
|
)
|
|
|
(143,127
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment (net)
|
|
$
|
141,922
|
|
|
$
|
129,493
|
|
|
|
|
|
|
|
|
|
|
Other
accrued expenses
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Royalties
|
|
$
|
985
|
|
|
$
|
563
|
|
Professional fees
|
|
|
1,494
|
|
|
|
1,145
|
|
Warranty
|
|
|
923
|
|
|
|
2,296
|
|
Other
|
|
|
625
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,027
|
|
|
$
|
4,024
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4
|
Short-term
investments
|
The Companys short-term investments include tax advantaged
municipal securities with a minimum Moodys credit rating
of A3 and a minimum Standard & Poors credit
rating of A-. As of December 31, 2008, the Company did not
hold auction rate securities. The Companys investment
policy limits the effective maturity on individual securities to
six years and an average portfolio maturity to three years. At
December 31, 2008, the Companys portfolios had an
average term of three years and an average credit quality of AA3
as defined by Moodys.
F-17
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a summary of short-term investments as of
December 31, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$
|
440,070
|
|
|
$
|
6,779
|
|
|
$
|
(1,793
|
)
|
|
$
|
445,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$
|
355,216
|
|
|
$
|
2,448
|
|
|
$
|
(133
|
)
|
|
$
|
357,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and estimated fair value of
available-for-sale marketable securities as of December 31,
2008, by contractual maturity, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
$
|
91,598
|
|
|
$
|
770
|
|
|
$
|
|
|
|
$
|
92,368
|
|
After one year through five years
|
|
|
338,766
|
|
|
|
5,807
|
|
|
|
(1,793
|
)
|
|
|
342,780
|
|
After five through ten years
|
|
|
9,706
|
|
|
|
202
|
|
|
|
|
|
|
|
9,908
|
|
Ten years and thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
440,070
|
|
|
$
|
6,779
|
|
|
$
|
(1,793
|
)
|
|
$
|
445,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the estimated fair values and gross
unrealized losses for the Companys investments in
individual securities that have been in a continuous unrealized
loss position deemed to be temporary for less than
12 months and for more than 12 months (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
More than 12 Months
|
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$
|
56,174
|
|
|
$
|
(628
|
)
|
|
$
|
17,606
|
|
|
$
|
(1,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$
|
26,199
|
|
|
$
|
(52
|
)
|
|
$
|
29,439
|
|
|
$
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net unrealized losses on the Companys investments in
municipal securities were primarily caused by market forces
resulting from a recent and significant sell off of securities
by large holders, such as insurance companies and financial
institutions, as they were forced to increase their cash reserve
positions. Yields for high-quality short-term municipal paper
have risen, which have negatively impacted the Companys
portfolios, which have an average term of three years. The
Companys current valuation is related to this liquidity
impact and is not based on the credit worthiness of the
securities held by the Company. The contractual terms of those
investments do not permit the issuer to settle the securities at
a price less than the amortized cost of the investment. The
Company does not consider its investments in municipal
securities with a current unrealized loss position to be
other-than-temporarily impaired at December 31, 2008 since
the Company has the ability and intent to hold those investments
until a recovery of fair value, which may be at maturity. Gross
realized gains from the sale of short-term investments were
$1,142,000, $0, and $260,000 for the years ended
December 31, 2008, 2007 and 2006, respectively. Gross
F-18
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
realized losses from the sale of short-term investments were
$133,000, $274,000, and $130,000 for the years ended
December 31, 2008, 2007 and 2006, respectively.
|
|
Note 5
|
Fair
value measurements
|
The Company adopted SFAS No. 157 effective
January 1, 2008 for financial assets and liabilities
measured at fair value. SFAS No. 157 defines fair
value, expands disclosure requirements around fair value and
specifies a hierarchy of valuation techniques based on whether
the inputs to those valuation techniques are observable or
unobservable. Observable inputs reflect market data obtained
from independent sources, while unobservable inputs reflect the
Companys market assumptions. These two types of inputs
create the following fair value hierarchy:
|
|
|
|
|
Level 1 Quoted prices for identical instruments
in active markets.
|
|
|
|
Level 2 Quoted prices for similar instruments
in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived
valuations in which all significant inputs and significant value
drivers are observable in active markets.
|
|
|
|
Level 3 Valuations derived from valuation
techniques in which one or more significant inputs or
significant value drivers are unobservable.
|
This hierarchy requires the Company to use observable market
data, when available, and to minimize the use of unobservable
inputs when determining fair value. A financial
instruments categorization within the valuation hierarchy
is based upon the lowest level of input that is significant to
the fair value measurement.
Following is a description of the Companys valuation
methodologies used for instruments measured at fair value, as
well as the general classification of such instruments pursuant
to the valuation hierarchy. Where appropriate, the description
includes details of the valuation models, the key inputs to
those models, as well as any significant assumptions.
Assets
and liabilities measured at fair value on a recurring
basis:
The Companys available-for-sale securities are comprised
of tax advantaged municipal securities and money market funds.
When available, the Company generally uses quoted market prices
to determine fair value, and classifies such items as
Level 1. If quoted market prices are not available, prices
are determined using prices for recently traded financial
instruments with similar underlying terms as well as directly or
indirectly observable inputs, such as interest rates and yield
curves that are observable at commonly quoted intervals. The
Company classifies such items as Level 2.
F-19
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the financial instruments carried
at fair value, by caption on the consolidated balance sheets and
by SFAS No. 157 valuation hierarchy (as described
above) as of December 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2008
|
|
|
|
Quoted prices in
|
|
|
|
|
|
|
|
|
Total carrying
|
|
|
|
active markets for
|
|
|
Significant other
|
|
|
Significant
|
|
|
value in the
|
|
|
|
identical assets
|
|
|
observable inputs
|
|
|
unobservable inputs
|
|
|
consolidated
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
balance sheet
|
|
|
Cash and cash equivalents
|
|
$
|
15,476
|
|
|
$
|
4,602
|
|
|
$
|
|
|
|
$
|
20,078
|
|
Short-term investments
|
|
|
|
|
|
|
445,056
|
|
|
|
|
|
|
|
445,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
15,476
|
|
|
$
|
449,658
|
|
|
$
|
|
|
|
$
|
465,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
and liabilities measured at fair value on a non-recurring
basis:
Certain assets and liabilities are measured at fair value on a
non-recurring basis and therefore are not included in the table
above. Items valued using such internally generated valuation
techniques are classified according to the lowest level input or
value driver that is significant to the valuation. Thus, an item
may be classified as Level 3 even though there may be some
significant inputs that are readily observable. Such instruments
are not measured at fair value on an ongoing basis but are
subject to fair value adjustments in certain circumstances (for
example, when there is evidence of impairment).
Equity
investment in private company
In 2006, the Company invested in Qualigen, Inc.
(Qualigen), a private company. The valuation of
investments in non-public companies requires significant
management judgment due to the absence of quoted market prices,
inherent lack of liquidity and the long-term nature of such
assets. The Companys equity investments in private
companies are valued initially based upon the transaction price
under the cost method of accounting. Equity investments in
non-public companies are classified as Level 3 in the fair
value hierarchy. The Companys investment in Qualigen,
which totaled approximately $5,404,000 as of December 31,
2008, is included in License, manufacturing access fees
and other assets, net on the consolidated balance sheets.
The Company records impairment charges when an investment has
experienced a decline that is deemed to be other-than-temporary.
The determination that a decline is other-than-temporary is, in
part, subjective and influenced by many factors. Future adverse
changes in market conditions or poor operating results of
investees could result in losses or an inability to recover the
carrying value of the investments, thereby possibly requiring
impairment charges in the future. When assessing investments in
private companies for an other-than-temporary decline in value,
the Company considers many factors including, but not limited
to, the following: the share price from the investees
latest financing round, the performance of the investee in
relation to its own operating targets and its business plan, the
investees revenue and cost trends, the investees
liquidity and cash position, including its cash burn rate, and
market acceptance of the investees products and services.
From time to time, the Company may consider third party
evaluations or valuation reports. The Company also considers new
products
and/or
services that the investee may have forthcoming, any significant
news specific to the investee, the investees competitors
and/or
industry and the outlook of the overall industry in which the
investee operates. In the event the Companys judgments
change as to other-than temporary declines in value, the Company
may record an impairment loss, which could have an adverse
impact on its results of operations.
During the third quarter of 2008, the Company received financial
statements from Qualigen that indicated potential issues towards
the execution of their long-term sales plans. As a result, with
the consultation and assistance of a third party valuation
company, and the support of Qualigen management, the Company
performed a valuation
F-20
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of Qualigen. The valuation of the Companys investment was
based upon several factors and included both a market approach
and an income (discounted cash flow method) approach. The range
of these two approaches resulted in a potential value of the
Companys investment between $4,172,000 and $6,609,000. The
company concluded that an equal weighting of the market and
income methods was appropriate and as a result of this valuation
the Companys ownership of Qualigen was valued at
approximately $5,404,000. The Company believes that the decline
in the value of this investment from its initial cost basis was
an other-than-temporary impairment of our investment and thus it
recorded an impairment charge of $1,589,000 to write down the
carrying value of its equity interest. This amount is included
in Other income/(expense) on the consolidated
statements of income.
|
|
Note 6
|
Intangible
and other assets by asset class and related accumulated
amortization
|
Intangible assets are recorded at cost, less accumulated
amortization. Amortization of intangible assets is provided over
their estimated useful lives ranging from 1 to 20 years on
a straight-line basis (weighted average amortization period of
6 years at December 31, 2008). The Companys
intangible and other assets and related accumulated amortization
consisted of the following (in thousands, except number of
years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
December 31,
|
|
|
|
Average
|
|
2008
|
|
|
2007
|
|
|
|
Amortization
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Period (Years)
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Intangible and other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized software
|
|
10
|
|
$
|
25,142
|
|
|
$
|
11,733
|
|
|
$
|
13,409
|
|
|
$
|
25,142
|
|
|
$
|
9,219
|
|
|
$
|
15,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill(1)
|
|
N/A
|
|
$
|
26,298
|
|
|
$
|
7,677
|
|
|
$
|
18,621
|
|
|
$
|
26,298
|
|
|
$
|
7,677
|
|
|
$
|
18,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License, manufacturing access fees and other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Molecular Profiling Institute, Inc.
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,500
|
|
|
|
|
|
|
|
2,500
|
|
Investment in Qualigen,
Inc.(2)
|
|
N/A
|
|
|
5,404
|
|
|
|
|
|
|
|
5,404
|
|
|
|
6,993
|
|
|
|
|
|
|
|
6,993
|
|
Patents
|
|
8
|
|
|
18,093
|
|
|
|
16,817
|
|
|
|
1,276
|
|
|
|
17,304
|
|
|
|
16,286
|
|
|
|
1,018
|
|
Purchased intangible assets
|
|
20
|
|
|
33,636
|
|
|
|
33,338
|
|
|
|
298
|
|
|
|
33,636
|
|
|
|
33,002
|
|
|
|
634
|
|
License and manufacturing access
fees(3)
|
|
10
|
|
|
64,507
|
|
|
|
18,488
|
|
|
|
46,019
|
|
|
|
53,326
|
|
|
|
10,186
|
|
|
|
43,140
|
|
Other assets
|
|
N/A
|
|
|
3,611
|
|
|
|
|
|
|
|
3,611
|
|
|
|
3,911
|
|
|
|
|
|
|
|
3,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
125,251
|
|
|
$
|
68,643
|
|
|
$
|
56,608
|
|
|
$
|
117,670
|
|
|
$
|
59,474
|
|
|
$
|
58,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In accordance with SFAS No. 142, goodwill is no longer
amortized. |
|
(2) |
|
The change in the Companys investment in Qualigen is due
to an impairment charge of $1,589,000 recorded during the year
ended December 31, 2008. See Note 5 for a complete
discussion of the impairment analysis. |
|
(3) |
|
The Company recorded an impairment charge for the net
capitalized balance of $3,496,000 under its license agreement
with Corixa Corporation. See complete discussion below. |
In January 2008, Caris Diagnostics completed the acquisition of
Molecular Profiling Institute, Inc. Pursuant to this sale
transaction, the Companys equity interest in Molecular
Profiling was converted into approximately $4,400,000 of cash
proceeds, of which $4,100,000 was received in January 2008 and
the remaining $300,000 was placed into an escrow fund
established to satisfy the Companys pro-rata share of
indemnification obligations under the Caris/Molecular Profiling
merger agreement. The Company recorded a $1,600,000 gain
associated with the initial $4,100,000 received in January 2008,
and will record the remaining gain if and when any funds are
released to the Company from escrow.
In May 2008, pursuant to the Companys supply and purchase
agreement with F. Hoffman-La Roche Ltd. and its affiliate
Roche Molecular Systems, Inc. (together referred to as
Roche), upon the first commercial sale of its
F-21
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CE-marked APTIMA HPV assay in Europe, the Company paid Roche
$10,000,000 in manufacturing access fees. Prior to and including
May 2008, the Companys original payment to Roche of
$20,000,000 was being amortized to R&D expense. Beginning
in June 2008, the additional payment of $10,000,000 and any
unamortized amounts remaining from the original payment are
amortized to cost of product sales.
In June 2008, the Company recorded an impairment charge for the
net capitalized balance of $3,496,000 under its license
agreement with Corixa Corporation. This charge is included in
R&D expense on the consolidated statements of income. Under
the license agreement, the Company was granted exclusive rights
to several licenses and pending patents, including AMACR, to
develop, manufacture and sell in-vitro, nucleic acid and
antibody-based assays for the prostate cancer market. The amount
of license fees paid to Corixa was initially capitalized based
on the Companys assessment at that time of the alternative
future uses of the assets, including the Companys initial
intent to commercialize the AMACR marker. The Company retains
the right to sublicense any of the markers acquired. The Corixa
intellectual property was being amortized to R&D expense
based upon the estimated life of the underlying patents
acquired. In the second quarter of 2008, a series of events
indicated that future alternative uses of the capitalized
intangible asset were unlikely and that recoverability of the
asset through future cash flows was not considered likely enough
to support continued capitalization. These second quarter 2008
indicators of impairment included decisions on the
Companys planned commercial approach for oncology
diagnostic products, the completion of a detailed review of the
intellectual property suite acquired from Corixa, including the
Companys assessment of the proven clinical utility for a
majority of the related markers, and the potential for near term
sublicense income that could be generated from the intellectual
property acquired.
As of December 31, 2008, the Company had capitalized
$13,409,000, net, in software costs associated with development
of the TIGRIS instrument.
The Company had aggregate amortization expense of $8,187,000,
$7,567,000, and $6,272,000 for the years ended December 31,
2008, 2007 and 2006, respectively, including $2,514,000 relating
to capitalized software in each of those years.
The expected future annual amortization expense of the
Companys intangible assets is as follows (in thousands):
|
|
|
|
|
|
|
Amortization
|
|
Years Ended December 31,
|
|
Expense
|
|
|
2009
|
|
$
|
8,061
|
|
2010
|
|
|
7,610
|
|
2011
|
|
|
7,563
|
|
2012
|
|
|
7,475
|
|
2013
|
|
|
7,407
|
|
Thereafter
|
|
|
22,886
|
|
|
|
|
|
|
Total
|
|
$
|
61,002
|
|
|
|
|
|
|
The Company has an unsecured bank line of credit agreement with
Wells Fargo Bank, N.A., which expires in July 2009, under which
the Company may borrow up to $10,000,000, subject to a
borrowing base formula, at the banks prime
rate, or at LIBOR plus 1.0%. At December 31, 2008, the
Company did not have any amounts outstanding under the bank line
and the Company has not taken advances against the line of
credit since its inception. The Company was in compliance with
all of the financial and restrictive covenants required by the
line of credit agreement at December 31, 2008.
F-22
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of earnings before income tax were (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
United States
|
|
$
|
160,509
|
|
|
$
|
109,431
|
|
|
$
|
91,297
|
|
Rest of World
|
|
|
354
|
|
|
|
2,166
|
|
|
|
1,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
160,863
|
|
|
$
|
111,597
|
|
|
$
|
92,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income tax consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
48,758
|
|
|
$
|
31,243
|
|
|
$
|
37,225
|
|
Rest of World
|
|
|
(6
|
)
|
|
|
541
|
|
|
|
300
|
|
State
|
|
|
9,941
|
|
|
|
1,826
|
|
|
|
1,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,693
|
|
|
|
33,610
|
|
|
|
39,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(4,831
|
)
|
|
|
(7,816
|
)
|
|
|
(7,821
|
)
|
Rest of World
|
|
|
79
|
|
|
|
(26
|
)
|
|
|
(58
|
)
|
State
|
|
|
(32
|
)
|
|
|
(311
|
)
|
|
|
1,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,784
|
)
|
|
|
(8,153
|
)
|
|
|
(6,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
53,909
|
|
|
$
|
25,457
|
|
|
$
|
33,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Significant components of the Companys deferred tax assets
and liabilities for federal and state income taxes are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Research and other tax credit carry-forwards
|
|
$
|
1,808
|
|
|
$
|
3,092
|
|
Other intangibles
|
|
|
1,433
|
|
|
|
|
|
Inventory reserves and capitalization
|
|
|
1,964
|
|
|
|
3,501
|
|
Deferred revenue
|
|
|
1,408
|
|
|
|
2,881
|
|
Deferred compensation
|
|
|
1,754
|
|
|
|
1,577
|
|
Stock compensation
|
|
|
16,529
|
|
|
|
12,061
|
|
Accrued vacation
|
|
|
2,372
|
|
|
|
2,121
|
|
Other accruals and reserves (net)
|
|
|
2,143
|
|
|
|
1,217
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
29,411
|
|
|
|
26,450
|
|
Valuation allowance
|
|
|
(95
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net deferred tax assets
|
|
$
|
29,316
|
|
|
$
|
26,450
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Other intangibles
|
|
$
|
|
|
|
$
|
(1,123
|
)
|
Capitalized costs expensed for tax purposes
|
|
|
(5,681
|
)
|
|
|
(6,901
|
)
|
Depreciation
|
|
|
(2,390
|
)
|
|
|
(924
|
)
|
Unrealized gains on short-term investments
|
|
|
(1,745
|
)
|
|
|
(810
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(9,816
|
)
|
|
|
(9,758
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
19,500
|
|
|
$
|
16,692
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, the Company also had California
research and development credit carry-forwards of approximately
$2,782,000, which do not expire. In accordance with applicable
state rules, the Companys use of its credit carry-forwards
could be limited in the event of certain cumulative changes in
the Companys stock ownership.
F-24
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The provision for income tax reconciles to the amount computed
by applying the federal statutory rate to income before tax as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Expected income tax provision at federal statutory rate
|
|
$
|
56,302
|
|
|
|
35
|
%
|
|
$
|
39,059
|
|
|
|
35
|
%
|
|
$
|
32,548
|
|
|
|
35
|
%
|
State income tax provision, net of federal benefit
|
|
|
7,275
|
|
|
|
5
|
%
|
|
|
4,628
|
|
|
|
4
|
%
|
|
|
3,850
|
|
|
|
4
|
%
|
Tax exempt interest income
|
|
|
(5,210
|
)
|
|
|
(3
|
)%
|
|
|
(3,453
|
)
|
|
|
(3
|
)%
|
|
|
(1,981
|
)
|
|
|
(2
|
)%
|
Domestic manufacturing tax benefits
|
|
|
(2,920
|
)
|
|
|
(2
|
)%
|
|
|
(1,521
|
)
|
|
|
(1
|
)%
|
|
|
(788
|
)
|
|
|
(1
|
)%
|
Research tax credits
|
|
|
(1,591
|
)
|
|
|
(1
|
)%
|
|
|
(1,911
|
)
|
|
|
(2
|
)%
|
|
|
(1,319
|
)
|
|
|
(2
|
)%
|
Settlements with tax authorities
|
|
|
(979
|
)
|
|
|
(1
|
)%
|
|
|
(11,145
|
)
|
|
|
(10
|
)%
|
|
|
|
|
|
|
0
|
%
|
Other, net
|
|
|
1,032
|
|
|
|
1
|
%
|
|
|
(200
|
)
|
|
|
0
|
%
|
|
|
1,186
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual income tax provision
|
|
$
|
53,909
|
|
|
|
34
|
%
|
|
$
|
25,457
|
|
|
|
23
|
%
|
|
$
|
33,496
|
|
|
|
36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective January 1, 2007, the Company adopted FASB
Interpretation No. 48 (FIN 48). The
following is a reconciliation of the cumulative unrecognized tax
benefits:
|
|
|
|
|
Unrecognized tax benefits as of January 1, 2007 (including
the cumulative effect increase)
|
|
$
|
17,512
|
|
Decrease in unrecognized tax benefits for years prior to 2007
|
|
|
(289
|
)
|
Increase in unrecognized tax benefits for 2007
|
|
|
1,189
|
|
Decrease in unrecognized tax benefits for settlements with tax
authorities during 2007
|
|
|
(13,766
|
)
|
Decrease in unrecognized tax benefits for lapse of statute of
limitations
|
|
|
(43
|
)
|
|
|
|
|
|
Unrecognized tax benefits as of December 31, 2007
(including the cumulative effect increase)
|
|
|
4,603
|
|
Increase in unrecognized tax benefits for years prior to 2008
|
|
|
719
|
|
Increase in unrecognized tax benefits for 2008
|
|
|
1,326
|
|
Decrease in unrecognized tax benefits for settlements with tax
authorities during 2008
|
|
|
(858
|
)
|
Decrease in unrecognized tax benefits for lapse of statute of
limitations
|
|
|
(37
|
)
|
|
|
|
|
|
Unrecognized tax benefits as of December 31, 2008
|
|
$
|
5,753
|
|
|
|
|
|
|
All of the unrecognized tax benefits, if recognized, would
affect the Companys effective tax rate. The Company does
not anticipate there will be a significant change in the
unrecognized tax benefits within the next twelve months.
It is the Companys practice to include interest and
penalties that related to income tax matters as a component of
income tax expense. Including the cumulative effect of adopting
FIN 48, $397,000 of interest and $0 of penalties were
accrued as of January 1, 2008. As of December 31,
2008, the accrued interest balance was $455,000.
Material filings subject to future examination are the
Companys federal tax returns for the 2006 and 2007 tax
years and its California tax returns for the 2005, 2006 and 2007
tax years.
Tax benefits of $2,493,000, $14,606,000, and $9,378,000 for the
years ended December 31, 2008, 2007 and 2006, respectively,
related to employee stock compensation programs were credited to
stockholders equity.
F-25
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 9
|
Stockholders
equity
|
Stock
options and restricted stock awards
The Companys stock option program is a broad-based,
long-term retention program that is intended to attract and
retain talented employees and to align stockholder and employee
interests. Substantially all of the Companys full-time
employees have historically participated in the Companys
stock option program.
In May 2003, the Company adopted, and the Companys
stockholders subsequently approved, The 2003 Incentive Award
Plan (the 2003 Plan). The 2003 Plan provides for
equity incentives for officers, directors, employees and
consultants through the granting of incentive and non-statutory
stock options, restricted stock and stock appreciation rights.
The exercise price of each stock option granted under the 2003
Plan must be equal to or greater than the fair market value of
the Companys common stock on the date of grant. Stock
options granted under the 2003 Plan are generally subject to
vesting at the rate of 25% one year from the grant date and
1/48
each month thereafter until the options are fully vested. Annual
grants to non-employee directors of the Company vest over one
year at the rate of
1/12
of the shares vesting monthly.
In May 2006, the Companys stockholders approved an
amendment and restatement of the 2003 Plan that increased the
aggregate number of shares of common stock authorized for
issuance under the 2003 Plan by 3,000,000 shares, from
5,000,000 shares to 8,000,000 shares. Pursuant to the
amended 2003 Plan, the Board of Directors or Compensation
Committee, as applicable, may continue to determine the terms
and vesting of all options and other awards granted under the
2003 Plan; however, in no event may the award term exceed seven
years (in lieu of ten years under the 2003 Plan prior to its
amendment). Further, the number of shares available for issuance
under the amended 2003 Plan are reduced by two shares for each
share of restricted stock granted under the 2003 Plan after
May 17, 2006 (in lieu of a reduction of one share under the
2003 Plan prior to its amendment).
In November 2002, the Company adopted The 2002 New Hire Stock
Option Plan (the 2002 Plan) that authorized the
issuance of up to 400,000 shares of common stock for grants
under the 2002 Plan. The 2002 Plan provides for the grant of
non-statutory stock options only, with exercise price, option
term and vesting terms generally the same as those under the
2000 Plan described below. Options may only be granted under the
2002 Plan to newly hired employees of the Company.
In August 2000, the Company adopted, and the Companys sole
stockholder subsequently approved, The 2000 Equity Participation
Plan (the 2000 Plan) that authorized the issuance of
up to 4,827,946 shares of common stock for grants under the
2000 Plan. The 2000 Plan provides for the grant of incentive and
non-statutory stock options to employees, directors and
consultants of the Company. The exercise price of each option
granted under the 2000 Plan must be equal to or greater than the
fair market value of the Companys stock on the date of
grant. Generally, options vest 25% one year from the grant date
and
1/48
each month thereafter until the options are fully vested.
A summary of the Companys stock option activity for all
option plans is as follows (in thousands, except per share data
and number of years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Life (Years)
|
|
|
Value
|
|
|
Outstanding at December 31, 2007
|
|
|
5,518
|
|
|
$
|
40.86
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
950
|
|
|
|
58.30
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(525
|
)
|
|
|
31.95
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(286
|
)
|
|
|
50.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
5,657
|
|
|
$
|
44.12
|
|
|
|
5.4
|
|
|
$
|
32,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008
|
|
|
3,568
|
|
|
$
|
37.05
|
|
|
|
5.0
|
|
|
$
|
32,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company defines in-the-money options at December 31,
2008 as options that had exercise prices that were lower than
the $42.84 closing market price of its common stock at that
date. The aggregate intrinsic value of options outstanding at
December 31, 2008 is calculated as the difference between
the exercise price of the underlying options and the market
price of the Companys common stock for the approximately
2,317,000 shares that were in-the-money at that date. The
total intrinsic value of options exercised during the years
ended December 31, 2008, 2007 and 2006 was $12,264,000,
$45,717,000, and $26,651,000, respectively, determined as of the
exercise dates.
A summary of the Companys restricted stock award activity
is as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Unvested at December 31, 2007
|
|
|
262
|
|
|
$
|
53.36
|
|
Granted
|
|
|
146
|
|
|
|
59.86
|
|
Vested and exercised
|
|
|
(82
|
)
|
|
|
50.46
|
|
Forfeited
|
|
|
(32
|
)
|
|
|
53.94
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2008
|
|
|
294
|
|
|
$
|
57.51
|
|
|
|
|
|
|
|
|
|
|
The fair value of the 82,019, 69,846, and 47,013 restricted
stock and Deferred Issuance Restricted Stock awards that vested
during the years ended December 31, 2008, 2007 and 2006,
respectively, was approximately $4,269,000, $3,187,000 and
$1,964,000, respectively.
Additional information about stock options outstanding at
December 31, 2008 with exercise prices less than or above
$42.84 per share, the closing price as of December 31, 2008
is as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Total
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
|
of
|
|
|
Exercise
|
|
|
of
|
|
|
Exercise
|
|
|
of
|
|
|
Exercise
|
|
As of December 31, 2008
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
In-the-money
|
|
|
2,208
|
|
|
$
|
28.05
|
|
|
|
109
|
|
|
$
|
40.04
|
|
|
|
2,317
|
|
|
$
|
28.62
|
|
Out-of-the-money
|
|
|
1,360
|
|
|
|
51.68
|
|
|
|
1,980
|
|
|
|
57.08
|
|
|
|
3,340
|
|
|
|
54.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total options outstanding
|
|
|
3,568
|
|
|
|
|
|
|
|
2,089
|
|
|
|
|
|
|
|
5,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock available for future grants under all
stock option plans were 548,960 at December 31, 2008.
F-27
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The weighted-average grant-date fair value per share of options
granted during the periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Exercise price equal to the fair value of common stock on the
grant date:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average exercise price
|
|
$
|
58.30
|
|
|
$
|
59.11
|
|
|
$
|
50.08
|
|
Weighted-average option fair value
|
|
$
|
18.36
|
|
|
$
|
21.44
|
|
|
$
|
20.54
|
|
Exercise price greater than fair value of common stock on the
grant date:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average exercise price
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Weighted-average option fair value
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Employee
Stock Purchase Plan
In May 2003, the Company adopted, and the Companys
stockholders subsequently approved, the ESPP that authorized the
issuance of up to 1,000,000 shares of the Companys
common stock. The ESPP is intended to qualify under
Section 423 of the Internal Revenue Code of 1986, as
amended, and is for the benefit of qualifying employees as
designated by the Board of Directors. Under the terms of the
ESPP, purchases are made semiannually. Participating employees
may elect to have a maximum of 15% of their compensation, up to
a maximum of $10,625 per six month period, withheld through
payroll deductions to purchase shares of common stock under the
ESPP. The purchase price of the common stock purchased under the
ESPP is equal to 85% of the fair market value of the common
stock on the offering or Grant Date or the exercise
or purchase date, whichever is lower. During the years ended
December 31, 2008, 2007 and 2006, employees purchased
97,618, 74,337, and 81,356 shares at an average price of
$37.91, $47.76, and $42.85 per share, respectively. As of
December 31, 2008, a total of 482,978 shares were
available for future issuance under the ESPP.
Stock
Repurchase Program
In August 2008, the Companys Board of Directors authorized
the repurchase of up to $250,000,000 of the Companys
common stock over the two years following adoption of the
program, through negotiated or open market transactions. There
is no minimum or maximum number of shares to be repurchased
under the program. As of December 31, 2008, the Company
repurchased and retired approximately 1,705,400 shares
under this program at an average price of $43.96 or $75,000,000
in total. When stock is repurchased and retired, the amount paid
in excess of par value is recorded to additional paid-in capital.
|
|
Note 10
|
Commitments
and contingencies
|
Lease
commitments
The Company leases certain facilities under operating leases
that expire at various dates through August 31, 2009.
Future minimum payments under these operating leases were
$70,000 as of December 31, 2008. In February 2008, the
Company completed the acquisition of the facility where it
manufactures its blood screening products, which was previously
leased.
Rent expense was $486,000, $1,022,000, and $2,172,000 for the
years ended December 31, 2008, 2007 and 2006, respectively.
Purchase
commitments
The Company is currently developing a new instrument platform,
called the Panther instrument system, designed to bring the
benefits of full automation and a broad molecular diagnostics
menu to low to mid-volume customers. In July 2007, the Company
authorized Stratec Biomedical Systems AG (Stratec),
to commence its
F-28
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Phase 2 development activities pursuant to its Development
Agreement for the Panther instrument system. Stratec is
providing services for the design and development of the Panther
Instrument System at a fixed price of $9,400,000, to be paid in
installments due upon achievement of specified technical
milestones, of which the Company expects $4,190,000 to be paid
in 2009. As of December 31, 2008, the Company had $712,000
in outstanding purchase orders for the remaining prototype
instruments to be purchased in connection with the Development
Agreement. In addition, the Company will purchase validation,
pre-production and production instruments, at specified fixed
transfer prices, that will cost approximately $8,400,000 in the
aggregate if it elects to purchase the number of each instrument
type it currently expects to purchase. Of the $8,400,000, the
Company expects to purchase $3,606,000 in validation and
pre-production instruments during 2009. The Company will also
purchase production tooling from Stratec at a cost of
approximately $1,200,000, $800,000 of which is expected to be
spent in 2009.
The Company is obligated to purchase TIGRIS instruments and raw
materials used in manufacturing from two key vendors. The
minimum combined purchase commitment was approximately
$24,110,000 as of December 31, 2008. Of the $24,110,000,
$15,910,000 is expected to be used to purchase TIGRIS
instruments, of which the Company anticipates that approximately
$6,988,000 will be sold to Novartis.
The Company has one third-party manufacturer for each of its
instrument product lines. It is dependent on this third-party
manufacturer, and this dependence exposes the Company to
increased risks associated with production delays, delivery
schedules, manufacturing capability, quality control, quality
assurance and costs. The Company has no firm long-term
commitments from any of its manufacturers to supply products for
any specific period, or in any specific quantity, except as may
be provided in a particular purchase order.
Royalty
commitments
In connection with its R&D efforts, the Company has various
license agreements with unrelated parties that provide the
Company with rights to develop and market products using certain
technology and patent rights maintained by the parties. Terms of
the various license agreements require the Company to pay
royalties ranging from 1% up to 16% of future sales on products
using the specified technology. Such agreements generally
provide for a term that commences upon execution and continues
until expiration of the last patent covering the licensed
technology. Under various license agreements the Company is
required to pay minimum annual royalty payments totaling
$175,000. During 2008, 2007 and 2006, the Company recorded to
cost of products sold $5,198,000, $5,020,000, and $3,598,000,
respectively, in royalty costs related to its various license
agreements.
Litigation
The Company is a party to the following litigation and may be
involved in other litigation in the ordinary course of business.
The Company intends to vigorously defend its interests in these
matters. The Company expects that the resolution of these
matters will not have a material adverse effect on its business,
financial condition or results of operations. However, due to
the uncertainties inherent in litigation, no assurance can be
given as to the outcome of these proceedings.
Digene
Corporation
In December 2006, Digene Corporation (Digene) filed
a demand for binding arbitration against Roche with the
International Centre for Dispute Resolution of the American
Arbitration Association in New York (ICDR).
Digenes arbitration demand challenges the validity of the
February 2005 supply and purchase agreement between us and
Roche. Under the supply and purchase agreement, Roche
manufactures and supplies us with human papillomavirus
(HPV) oligonucleotide products. Digenes demand
asserts, among other things, that Roche materially breached a
cross-license agreement between Roche and Digene by granting the
Company an improper sublicense and seeks a determination that
the supply and purchase agreement is null and void.
F-29
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On July 13, 2007, the ICDR arbitrators granted the
Companys petition to join the arbitration. On
August 27, 2007, Digene filed an amended arbitration demand
and asserted a claim against the Company for tortious
interference with the cross-license agreement. The arbitration
hearing in this matter commenced on October 27, 2008 and
the presentation of evidence concluded November 10, 2008.
In December 2008 and January 2009, the parties filed
post-hearing briefs and closing arguments were presented on
January 30, 2009.
The Company believes that the supply and purchase agreement is
valid and that its purchases of HPV oligonucleotide products
under the supply and purchase agreement are and will be in
accordance with applicable law. However, there can be no
assurance that the matters will be resolved in favor of the
Company.
|
|
Note 11
|
Collaborative
and license agreements
|
Novartis
(formerly Chiron Corporation)
In June 1998, the Company entered into a collaboration agreement
with Chiron (now Novartis) to develop, manufacture and market
nucleic acid probe assay systems for the blood screening and
clinical diagnostic markets. Under the terms of the
collaboration agreement, Novartis or a third party will market
and sell products that utilize Novartis intellectual
property relating to hepatitis C virus (HCV)
and human immunodeficiency virus (type 1) (HIV-1)
and the Companys patented technologies. The Company
received an up-front license fee of $10,000,000 under the
collaboration agreement in 1998. In September 1998, Chiron
assigned the clinical diagnostic portion of the collaboration
agreement to Bayer (which, in turn, assigned the clinical
diagnostics portion of the collaboration agreement to Siemens
Healthcare Diagnostics, Inc.).
Under the collaboration agreement, as amended, both Novartis and
the Company provide certain access to their intellectual
property. The Company has responsibility for research,
development and manufacturing of the blood screening products,
while Novartis has responsibility for marketing, distribution
and service of the blood screening products worldwide. The
agreement, as amended, contains the following deliverables from
the Company: (i) initial license of the Companys
technology, (ii) R&D, and (iii) manufacturing.
The Company determined that the technology license, R&D,
and manufacturing were not separate units of accounting, in
accordance with EITF Issue
No. 00-21.
The R&D and manufacturing do not have stand-alone value to
Novartis since the related efforts are based on unique
technology that could not be obtained from other vendors.
Accordingly, the Company has accounted for the elements as
follows: (i) initial license payment of the Companys
technology is being recognized over the expected development and
commercialization term (15 years); (ii) amounts paid
to the Company for R&D efforts, representing the
reimbursement of costs incurred by the Company, are shared 50/50
with Novartis and are recorded as collaborative research revenue
(there is no required minimum obligation for the Company to
provide services); and (iii) the Company manufactures the
products under the collaboration agreement and shares net
revenues of approximately 50/50 (ranging from 45.75% to 50.0%)
with Novartis, which support a reasonable margin related to
costs of manufacturing. Novartis is obligated to purchase all of
the quantities of these assays specified on a
90-day
demand forecast, due 90 days prior to the date Novartis
intends to take delivery, and certain quantities specified on a
rolling
12-month
forecast.
In January 2009, the Company entered into an agreement
(Amendment No. 11) with Novartis to amend the
June 11, 1998 collaboration agreement (the 1998
Agreement) between the parties. The effective date of
Amendment No. 11 is January 1, 2009. Amendment
No. 11 extends to June 30, 2025 the term of the
parties blood screening collaboration under the 1998
Agreement. The 1998 Agreement was scheduled to expire by its
terms in 2013. See Note 16 for further discussion of
Amendment No. 11.
U.S. blood centers began using the Procleix WNV assay to
screen donated blood under an Investigational New Drug
(IND) application in June 2003. The Company
submitted a Biologics License Application (BLA) for
the West Nile virus (WNV) assay to the FDA in
February 2005. For the years ended December 31, 2008, 2007
and 2006, the Company recognized $0, $0, and $9,205,000,
respectively, in collaborative research revenue through its
collaboration with Novartis from deliveries of WNV tests on a
cost recovery basis. For the years ended
F-30
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2008, 2007 and 2006, the Company recognized
$0, $355,000, and $1,009,000, respectively in reimbursements for
expenses incurred for WNV development research as collaborative
research revenue. In early 2006, the Company discontinued
recognizing these sales as collaborative research revenue upon
first shipment of FDA-approved and labeled product and now
records them as product sales.
In March 2003, the Company signed an amendment to the
collaboration agreement with Chiron (now Novartis) for the
development and commercialization of the Procleix Ultrio assay.
During the years ended December 31, 2008, 2007 and 2006,
the Company received $13,924,000, $5,525,000, and $1,591,000,
respectively, in non-refundable reimbursements for expenses
incurred related to the development of the Procleix Ultrio assay
from Novartis.
From inception through December 31, 2008, the Company
recognized a total of $1,054,000,000 in revenue under this
collaboration agreement and has $3,000,000 in deferred license
revenues as of December 31, 2008.
bioMérieux
Vitek, Inc.
Effective May 2, 1997, the Company entered into
collaborative research agreements with bioMérieux
Vitek, Inc. (bMx), which created a worldwide
relationship between Gen-Probe and bMx. In August 2000, the
Company entered into amended agreements with bMx that
transitioned the relationship from a collaborative arrangement
to two royalty-bearing license agreements covering a
semi-automated instrument and associated probe assays and an
advanced fully-automated instrument and probe assays, both for
the diagnosis of infectious diseases and detection of food
pathogens. In September 2004, the Company entered into a
termination agreement with bMx, which terminated one of the
August 2000 license agreements. Pursuant to the termination
agreement, bMx paid the Company an aggregate of approximately
$1,600,000 to conclude certain outstanding royalty and other
obligations under the terminated license agreement. Further, the
Company paid $1,000,000 to bMx to gain access to bMxs
intellectual property for detecting genetic mutations that
predispose people to blood clotting disorders. In February 2006,
bMx terminated the second of the two August 2000 license
agreements. In December 2006, bMx paid the Company $350,000 in
settlement of a minimum annual royalty obligation under this
agreement, thereby fulfilling its final obligations under the
terminated license.
In September 2004, at the same time the Company entered into the
first termination agreement referenced above, the Company also
entered into non-exclusive licensing agreements with bMx and its
affiliates that provide bMxs affiliates options to access
the Companys ribosomal RNA technologies for certain uses.
The Company refers to these agreements as the Easy Q agreement
and the GeneXpert agreement. Pursuant to the terms of these
agreements, bMxs affiliates paid the Company an aggregate
of $250,000 for limited non-exclusive, non-transferable,
research licenses, without the right to grant sublicenses except
to affiliates, and non-exclusive, non-transferable options for
licenses to develop diagnostic products for certain disease
targets using the Companys patented ribosomal RNA
technologies. The first of these options was exercised by
bMxs affiliates payment to the Company of $4,500,000
in January 2005. In December 2005, bMxs affiliates
exercised a second option and paid the Company $2,100,000. The
Company recognized an aggregate of $3,877,000 as license revenue
in 2005 as a result of these payments. bMxs affiliates had
an option to pay $1,000,000 by December 31, 2006 for access
to additional targets, but did not exercise this option. As a
result of the expiration of this option period, the Company
recognized a total of $2,973,000 as revenue in 2006 for amounts
previously paid by bMx but deferred.
Under each license, the Company will receive royalties on the
net sale of any products bMx and its affiliates develop using
the Companys intellectual property. The resulting license
agreements terminate upon the expiration of the last to expire
patent covered by the agreement. In the event of a change in
control with respect to bMx or its affiliates, the Company has
the right to terminate these agreements, and the respective
licenses granted to bMxs affiliates thereunder, upon
60 days prior written notice to bMx delivered within six
months of the date of the change in control. The respective
obligations of bMxs affiliates under the agreements is
guaranteed by bMx SA, the parent company of the bMx affiliates
that are parties to the agreements.
F-31
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 12
|
Significant
customers and geographic information
|
During the years ended December 31, 2008, 2007 and 2006,
48%, 45%, and 48%, respectively, of total revenues were from
Novartis. No other customer accounted for more than 10% of
revenues in any fiscal year. As of December 31, 2008 and
2007, the portions of trade accounts receivable related to
Novartis were 25% and 36%, respectively.
During the years ended December 31, 2008, 2007 and 2006,
48%, 46%, and 47%, respectively, of product sales were from the
sale of commercially approved blood screening products. Other
revenues related to the development of blood screening products
prior to commercial approval are recorded in collaborative
research revenue as disclosed in Note 11. During the years
ended December 31, 2008, 2007 and 2006, 52%, 54%, and 53%,
respectively, of product sales were from the sale of clinical
diagnostic products and instruments.
Total revenues by geographic region were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Total revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
363,225
|
|
|
$
|
322,907
|
|
|
$
|
273,606
|
|
Rest of World
|
|
|
109,470
|
|
|
|
80,107
|
|
|
|
81,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
472,695
|
|
|
$
|
403,014
|
|
|
$
|
354,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 13
|
Employee benefit plan
|
Effective May 1, 1990, Gen-Probe established a Defined
Contribution Plan covering substantially all employees of
Gen-Probe beginning the month after they are hired. Employees
may contribute up to 20% of their compensation per year (subject
to a maximum limit imposed by federal tax law). Gen-Probe is
obligated to make matching contributions equal to a maximum of
50% of the first 6% of compensation contributed by the employee.
The contributions charged to operations related to Gen-Probe
employees totaled $1,753,000, $1,614,000, and $1,636,000, for
the years ended December 31, 2008, 2007 and 2006,
respectively.
|
|
Note 14
|
Deferred
compensation plan
|
In May 2005, the Companys Board of Directors approved the
adoption of a Deferred Compensation Plan (the Plan),
which became effective as of June 30, 2005. The Plan allows
certain highly compensated management, key employees and
directors of the Company to defer up to 80% of annual base
salary or director fees and up to 80% of annual bonus
compensation. Deferred amounts are credited with gains and
losses based on the performance of deemed investment options
selected by a committee appointed by the Board of Directors to
administer the Plan. The Plan also allows for discretionary
contributions to be made by the Company. Participants may
receive distributions upon (i) a pre-set date or schedule
that is elected during an appropriate election period,
(ii) the occurrence of unforeseeable financial emergencies,
(iii) termination of employment (including retirement),
(iv) death, (v) disability, or (vi) a change in
control of the Company, as defined in the Plan. Certain key
participants must wait six months following termination of
employment to receive distributions. The Plan is subject to
Internal Revenue Code Section 409A.
The Company may terminate the Plan at any time with respect to
participants providing services to the Company. Upon termination
of the Plan, participants will be paid out in accordance with
their prior distribution elections and otherwise in accordance
with the Plan. Upon and for twelve (12) months following a
change of control, the Company has the right to terminate the
Plan and, notwithstanding any elections made by participants, to
pay out all benefits in a lump sum, subject to the provisions of
the Code. As of December 31, 2008, the Company had
approximately $3,715,000 of accrued deferred compensation under
the Plan. Of that amount, $1,553,000 and
F-32
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$2,162,000 have been classified as current and long term
liabilities within Accrued salaries and employee
benefits and Deferred compensation plan
liabilities, respectively.
|
|
Note 15
|
Quarterly
information (unaudited)
|
The following tables set forth the quarterly results of
operations for each quarter within the two-year period ended
December 31, 2008. The information for each of these
quarters is unaudited and has been prepared on the same basis as
the Companys audited consolidated financial statements. In
the opinion of management, all necessary adjustments, consisting
only of normal recurring accruals, have been included to fairly
present the unaudited quarterly results when read in conjunction
with the Companys audited consolidated financial
statements and related notes. The operating results of any
quarter are not necessarily indicative of results for any future
period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(In thousands, except per share data)
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product sales
|
|
$
|
101,507
|
|
|
$
|
113,701
|
|
|
$
|
108,253
|
|
|
$
|
105,759
|
|
Total revenues
|
|
|
122,563
|
|
|
|
119,814
|
|
|
|
121,177
|
|
|
|
109,141
|
|
Cost of product sales
|
|
|
32,636
|
|
|
|
32,510
|
|
|
|
30,681
|
|
|
|
32,202
|
|
Gross profit
|
|
|
68,871
|
|
|
|
81,191
|
|
|
|
77,572
|
|
|
|
73,557
|
|
Total operating expenses
|
|
|
79,547
|
|
|
|
87,002
|
|
|
|
78,805
|
|
|
|
81,946
|
|
Net income
|
|
|
31,945
|
|
|
|
24,791
|
|
|
|
29,078
|
|
|
|
21,140
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.59
|
|
|
$
|
0.46
|
|
|
$
|
0.54
|
|
|
$
|
0.40
|
|
Diluted(1)
|
|
$
|
0.58
|
|
|
$
|
0.45
|
|
|
$
|
0.53
|
|
|
$
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(In thousands, except per share data)
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product sales
|
|
$
|
87,152
|
|
|
$
|
93,897
|
|
|
$
|
97,402
|
|
|
$
|
92,426
|
|
Total revenues
|
|
|
101,051
|
|
|
|
101,281
|
|
|
|
101,733
|
|
|
|
98,949
|
|
Cost of product sales
|
|
|
29,160
|
|
|
|
30,178
|
|
|
|
31,810
|
|
|
|
28,493
|
|
Gross profit
|
|
|
57,992
|
|
|
|
63,719
|
|
|
|
65,592
|
|
|
|
63,933
|
|
Total operating expenses
|
|
|
70,235
|
|
|
|
76,625
|
|
|
|
80,423
|
|
|
|
76,437
|
|
Net income
|
|
|
21,475
|
|
|
|
27,002
|
|
|
|
17,251
|
|
|
|
20,412
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.41
|
|
|
$
|
0.51
|
|
|
$
|
0.32
|
|
|
$
|
0.39
|
|
Diluted
|
|
$
|
0.40
|
|
|
$
|
0.50
|
|
|
$
|
0.31
|
|
|
$
|
0.37
|
|
|
|
|
(1) |
|
Amounts shown may reflect rounding adjustments. |
F-33
GEN-PROBE
INCORPORATED
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 16
|
Subsequent
events
|
Amendment
to Novartis Agreement
In January 2009, the Company entered into Amendment No. 11
with Novartis to amend the 1998 Agreement between the parties.
The effective date of Amendment No. 11 is January 1,
2009. Amendment No. 11 extends to June 30, 2025 the
term of the parties blood screening collaboration under
the 1998 Agreement. The 1998 Agreement was scheduled to expire
by its terms in 2013.
The 1998 Agreement provided that the Company was solely
responsible for manufacturing costs incurred in connection with
the collaboration, while Novartis was responsible for sales and
marketing expenses associated with the collaboration. Amendment
No. 11 provides that, effective January 1, 2009, the
Company will recover 50% of its costs of goods sold incurred in
connection with the collaboration. In addition, the Company will
receive a percentage of the blood screening assay revenue
generated under the collaboration, as described in the next
paragraph.
The 1998 Agreement provided that the companies share revenue
from the sale of blood screening assays under the collaboration.
Under the terms of the 1998 Agreement, as previously amended,
the Companys share of revenue from any assay that included
a test for HCV was 45.75%. Amendment No. 11 modifies the
Companys share of such revenues, initially reducing it to
44% in 2009. The Companys share of blood screening assay
revenue increases in subsequent years as follows:
2010-2011,
46%;
2012-2013,
47%; 2014, 48%; and 2015, 50%. The Companys share of blood
screening assay revenue is fixed at 50% from January 1,
2015 though the remainder of the amended term of the agreement.
Under Amendment No. 11, the Companys share of blood
screening assay revenue from any assay that does not test for
HCV remains at 50%. As discussed above, the Company is entitled
to its designated percentage of revenue from the sale of blood
screening assays as well as the recovery of 50% of its costs of
goods sold. Amendment No. 11 also provides that Novartis
will reduce the amount of time between product sales and payment
of the Companys share of blood screening assay revenue
from 45 days to 30 days.
As part of Amendment No. 11, the parties have agreed, and
Novartis has agreed to provide certain funding, to customize the
Companys Panther instrument, a fully automated molecular
testing platform now in development, for use in the blood
screening market. Novartis has also agreed to pay the Company a
milestone payment upon the first commercial sale of the Panther
instrument. The parties will equally share any profit
attributable to Novartis sale or lease of Panther
instruments under the collaboration.
The companies also have agreed to evaluate, using the
Companys technologies, the development of companion
diagnostics for current or future Novartis medicines. Novartis
has agreed to provide certain funding to the Company in support
of initial research and development.
Offer
to Acquire Tepnel Life Sciences
In January 2009, the Company made a recommended cash offer to
acquire Tepnel Life Sciences, Plc (Tepnel), a
company registered in England and Wales, for approximately
$132,200,000 (based on the exchange rate described in the
offer). The Companys offer is subject to certain
conditions, including approval of the offer by a majority in
number representing 75% or more in value of Tepnels
shareholders entitled to vote with respect to the proposed
transaction.
F-34
SCHEDULE
II VALUATION AND QUALIFYING ACCOUNTS
For The Three Years Ended December 31, 2008
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Addition
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Cost and
|
|
|
|
|
|
End of
|
|
|
|
of Period
|
|
|
Expenses
|
|
|
Deductions(1)
|
|
|
Period
|
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008:
|
|
$
|
719
|
|
|
$
|
9
|
|
|
$
|
(28
|
)
|
|
$
|
700
|
|
Year Ended December 31, 2007:
|
|
$
|
670
|
|
|
$
|
130
|
|
|
$
|
(81
|
)
|
|
$
|
719
|
|
Year Ended December 31, 2006:
|
|
$
|
790
|
|
|
$
|
122
|
|
|
$
|
(242
|
)
|
|
$
|
670
|
|
Inventory reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008:
|
|
$
|
6,661
|
|
|
$
|
1,493
|
|
|
$
|
(2,460
|
)
|
|
$
|
5,694
|
|
Year Ended December 31, 2007:
|
|
$
|
5,802
|
|
|
$
|
1,043
|
|
|
$
|
(184
|
)
|
|
$
|
6,661
|
|
Year Ended December 31, 2006:
|
|
$
|
6,175
|
|
|
$
|
5,151
|
|
|
$
|
(5,524
|
)
|
|
$
|
5,802
|
|
|
|
|
(1) |
|
Represents amounts written off against the allowance or
reserves, or credited to earnings. |
S-1
INDEX TO
EXHIBITS
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
2
|
.1(2)
|
|
Separation and Distribution Agreement, dated May 24, 2002,
and amended and restated as of August 6, 2002, between
Gen-Probe Incorporated and Chugai Pharmaceutical Co., Ltd. (now
Rebio Gen, Inc.).
|
|
2
|
.2(27)
|
|
Rule 2.5 Announcement issued on January 30, 2009 by
Gen-Probe Incorporated and Tepnel Life Sciences, Plc.
|
|
2
|
.3(28)
|
|
Implementation Agreement dated January 30, 2009 by and
between Gen-Probe Incorporated and Tepnel Life Sciences Plc.
|
|
3
|
.1(2)
|
|
Form of Amended and Restated Certificate of Incorporation of
Gen-Probe Incorporated.
|
|
3
|
.2(7)
|
|
Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Gen-Probe Incorporated.
|
|
3
|
.3(32)
|
|
Amended and Restated Bylaws of Gen-Probe Incorporated.
|
|
3
|
.4(21)
|
|
Certificate of Elimination of the Series A Junior
Participating Preferred Stock of Gen-Probe Incorporated.
|
|
4
|
.1(2)
|
|
Specimen Common Stock Certificate.
|
|
10
|
.1(21)
|
|
The 2000 Equity Participation Plan of Gen-Probe Incorporated (as
last amended on November 16, 2006).
|
|
10
|
.2(21)
|
|
The 2000 Equity Participation Plan Form of Agreement and Grant
Notice for Non-Employee Directors (as last amended on
November 16, 2006).
|
|
10
|
.3(21)
|
|
The 2002 New Hire Stock Option Plan of Gen-Probe Incorporated
(as last amended on November 16, 2006).
|
|
10
|
.4(21)
|
|
The 2002 New Hire Stock Option Plan Form of Agreement and Grant
Notice (as last amended on November 16, 2006).
|
|
10
|
.5(21)
|
|
The 2003 Incentive Award Plan of Gen-Probe Incorporated (as last
amended on February 8, 2007).
|
|
10
|
.6(21)
|
|
The 2003 Incentive Award Plan Form of Agreements and Grant
Notices (as last amended on February 8, 2007).
|
|
10
|
.7(13)
|
|
The 2003 Incentive Award Plan Form of Restricted Stock Award
Agreement and Grant Notice, as amended.
|
|
10
|
.8(7)
|
|
Employee Stock Purchase Plan of Gen-Probe Incorporated, as
amended.
|
|
10
|
.9(22)
|
|
Gen-Probe Incorporated 2007 Executive Bonus Plan.
|
|
10
|
.10(19)
|
|
2007 Gen-Probe Employee Bonus Plan.
|
|
10
|
.11(16)
|
|
2008 Gen-Probe Employee Bonus Plan.
|
|
10
|
.12
|
|
Amended and Restated Gen-Probe Incorporated Deferred
Compensation Plan, effective January 1, 2008.
|
|
10
|
.13(4)
|
|
Gen-Probe Incorporated
Change-In-Control
Severance Compensation Plan for Employees.
|
|
10
|
.14
|
|
Amendment to Gen-Probe Incorporated
Change-in-Control
Severance Compensation Plan, dated October 2, 2008.
|
|
10
|
.15(3)
|
|
Agreement dated June 11, 1998 between Gen-Probe
Incorporated and Chiron Corporation (now Novartis Vaccines and
Diagnostics, Inc.).*
|
|
10
|
.16(3)
|
|
Amendment dated December 7, 1999 to Agreement dated
June 11, 1998 between Gen-Probe Incorporated and Chiron
Corporation (now Novartis Vaccines and Diagnostics, Inc.).
|
|
10
|
.17(1)
|
|
Amendment No. 2 dated February 1, 2000 to Agreement
dated June 11, 1998 between Gen-Probe Incorporated and
Chiron Corporation (now Novartis Vaccines and Diagnostics, Inc.).
|
|
10
|
.18(3)
|
|
Amendment No. 3 effective April 1, 2002 to Agreement
dated June 11, 1998 between Gen-Probe Incorporated and
Chiron Corporation (now Novartis Vaccines and Diagnostics,
Inc.).*
|
|
10
|
.19(5)
|
|
Amendment No. 4 effective March 5, 2003 to Agreement
dated June 11, 1998 between Gen-Probe Incorporated and
Chiron Corporation (now Novartis Vaccines and Diagnostics, Inc.).
|
|
10
|
.20(6)
|
|
Amendment No. 5 effective January 1, 2004 to Agreement
dated June 11, 1998 between Gen-Probe Incorporated and
Chiron Corporation (now Novartis Vaccines and Diagnostics,
Inc.).
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.21(10)
|
|
Amendment No. 6 effective January 1, 2004 to Agreement
dated as of June 11, 1998 between Gen-Probe Incorporation
and Chiron Corporation (now Novartis Vaccines and Diagnostics,
Inc.).*
|
|
10
|
.22(21)
|
|
Amendment No. 7 effective May 20, 2005 to the
Agreement dated as of June 11, 1998 between Gen-Probe
Incorporated and Chiron Corporation (now Novartis Vaccines and
Diagnostics, Inc.).
|
|
10
|
.23(15)
|
|
Amendment No. 8 effective February 8, 2006 to
Agreement dated June 11, 1998 between Gen-Probe
Incorporation and Chiron Corporation (now Novartis Vaccines and
Diagnostics, Inc.).
|
|
10
|
.24(17)
|
|
Amendment No. 9 effective July 1, 2006 to the
Agreement dated June 11, 1998 between Gen-Probe
Incorporated and Chiron Corporation (now Novartis Vaccines and
Diagnostics, Inc.).
|
|
10
|
.25
|
|
Amendment No. 10 effective September 30, 2007 to the
Agreement dated June 11, 1998 between Gen-Probe
Incorporated and Chiron Corporation (now Novartis Vaccines and
Diagnostics, Inc.).**
|
|
10
|
.26(3)
|
|
Addendum dated June 11, 1998 to Agreement dated
June 11, 1998 between Gen-Probe Incorporated and Chiron
Corporation (now Novartis Vaccines and Diagnostics, Inc.).*
|
|
10
|
.27(6)
|
|
Future Blood Screening Assay Ultrio Addendum
effective January 1, 2001 to the Agreement dated
June 11, 1998 between Gen-Probe Incorporated and Chiron
Corporation (now Novartis Vaccines and Diagnostics, Inc.).*
|
|
10
|
.28(10)
|
|
Modified Blood Screening Instrument eSAS 2 Addendum
effective January 1, 2002 to the Agreement dated
June 11, 1998 between Gen-Probe Incorporated and Chiron
Corporation (now Novartis Vaccines and Diagnostics, Inc.).*
|
|
10
|
.29(6)
|
|
Future Blood Screening Assay West Nile Virus
Addendum effective June 1, 2003 to the Agreement dated
June 11, 1998 between Gen-Probe Incorporated and Chiron
Corporation (now Novartis Vaccines and Diagnostics, Inc.).*
|
|
10
|
.30
|
|
Future Blood Screening Assay Ultrio 2 Addendum
effective October 1, 2008 to the Agreement dated as of
June 11, 1998 between Gen-Probe Incorporated and Chiron
Corporation (now Novartis Vaccines and Diagnostics, Inc.).**
|
|
10
|
.31(14)
|
|
Letter Agreement dated June 11, 1998 between Gen-Probe
Incorporated and Chiron Corporation (now Novartis Vaccines and
Diagnostics, Inc.).*
|
|
10
|
.32(1)
|
|
Supplemental Agreement dated April 2, 2001 to the Agreement
dated June 11, 1998 for Development, Distribution and
Licensing of TMA Products between Gen-Probe Incorporated and
Bayer Corporation.*
|
|
10
|
.33(18)
|
|
Settlement Agreement dated August 1, 2006 among Gen-Probe
Incorporated, Bayer HealthCare LLC and Bayer Corporation.*
|
|
10
|
.34(1)
|
|
Distribution Agreement dated May 2, 1997 between Gen-Probe
Incorporated and bioMérieux S.A.*
|
|
10
|
.35(3)
|
|
Distributorship Arrangements Agreement dated May 2, 1997
between Gen-Probe Incorporated and bioMérieux S.A.*
|
|
10
|
.36(1)
|
|
Renewal Amendment dated November 2, 1999 to the
Distribution Agreement and the Distributorship Arrangements
Agreement dated May 2, 1997 between Gen-Probe Incorporated
and bioMérieux S.A.
|
|
10
|
.37(1)
|
|
First Amendment dated August 4, 2000 to the Renewed
Distribution Agreement and the Distributorship Arrangements
Agreement dated May 2, 1997 between Gen-Probe Incorporated
and bioMérieux S.A.*
|
|
10
|
.38(7)
|
|
2003 Amendment dated May 2, 2003 to the Renewed
Distribution Agreement and the Distributorship Arrangements
Agreement dated May 2, 1997 between Gen-Probe Incorporated
and bioMérieux, S.A.*
|
|
10
|
.39(15)
|
|
2006 Amendment dated May 1, 2006 to the Renewed
Distributorship Agreement and the Distributorship Arrangements
Agreement dated May 2, 1997 between Gen-Probe Incorporated
and bioMérieux, S.A.
|
|
10
|
.40(8)
|
|
Ribosomal Nucleic Acid License and Option Agreement (for Easy Q
Instrument) dated September 30, 2004 between Gen-Probe
Incorporated and bioMérieux B.V.*
|
|
10
|
.41(8)
|
|
Guarantee Agreement dated September 30, 2004 by
bioMérieux S.A., on behalf of its subsidiary
bioMérieux, Inc. in favor of Gen-Probe Incorporated.
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.42(8)
|
|
Ribosomal Nucleic Acid License and Option Agreement (for
GeneXpert Instrument) dated September 30, 2004 by and
between Gen-Probe Incorporated and bioMérieux, Inc.*
|
|
10
|
.43(8)
|
|
Guarantee Agreement dated September 30, 2004, by
bioMérieux S.A., on behalf of its subsidiary
bioMérieux B.V. in favor of Gen-Probe Incorporated.
|
|
10
|
.44(8)
|
|
Side Letter dated October 1, 2004 by and between Gen-Probe
Incorporated, bioMérieux B.V., and bioMérieux, Inc.*
|
|
10
|
.45(8)
|
|
License Agreement entered into September 30, 2004 by and
between Gen-Probe Incorporated and bioMérieux B.V.*
|
|
10
|
.46(3)
|
|
License Agreement dated July 1, 2001 between Gen-Probe
Incorporated and Chugai Diagnostics Science Co., Ltd. (now Rebio
Gen, Inc.).
|
|
10
|
.47(3)
|
|
Distribution Agreement effective as of September 1, 1998
between Gen-Probe Incorporated and Chugai Diagnostics Science
Co., Ltd. (now Rebio Gen, Inc.).
|
|
10
|
.48(3)
|
|
First Amendment dated June 30, 2002 to September 1,
1998 Distribution Agreement between Gen-Probe Incorporated and
Chugai Diagnostics Science Co., Ltd. (now Rebio Gen, Inc.).
|
|
10
|
.49(3)
|
|
Co-Exclusive Agreement effective April 23, 1997 between
Gen-Probe Incorporated and The Board of Trustees of the Leland
Stanford Junior University.*
|
|
10
|
.50(1)
|
|
Amendment No. 1 effective April, 1998 to the License
Agreement effective April 23, 1997 between Stanford
University and Gen-Probe Incorporated.*
|
|
10
|
.51(3)
|
|
Non-Assertion Agreement dated February 7, 1997 between
Gen-Probe Incorporated and Organon Teknika B.V.*
|
|
10
|
.52(3)
|
|
Non-exclusive License Agreement under Vysis Collins
Patents dated June 22, 1999 between Gen-Probe Incorporated
and Vysis, Inc.*
|
|
10
|
.53(8)
|
|
Settlement Agreement under Vysis Collins Patents effective
September 17, 2004 by and between Gen-Probe Incorporated
and Vysis, Inc.*
|
|
10
|
.54(8)
|
|
Amendment to Nonexclusive License Agreement under Vysis
Collins Patents dated September 17, 2004 by and between
Gen-Probe Incorporated and Vysis, Inc.*
|
|
10
|
.55(3)
|
|
Amended and Restated License Agreement effective July 19,
2002 between Gen-Probe Incorporated and The Public Health
Research Institute of The City of New York, Inc.*
|
|
10
|
.56(3)
|
|
Development, License and Supply Agreement effective
October 16, 2000 between Gen-Probe Incorporated and KMC
Systems, Inc.*
|
|
10
|
.57(1)
|
|
First Amendment made as of September, 2001 to Agreement entered
into as of October 16, 2000 between Gen-Probe Incorporated
and KMC Systems, Inc.*
|
|
10
|
.58(3)
|
|
Supply Agreement effective March 5, 1998 between Gen-Probe
Incorporated and Boehringer Mannheim GmbH.*
|
|
10
|
.59(1)
|
|
First Amendment effective February 21, 2001 between
Gen-Probe Incorporated and Roche Diagnostics GmbH (the
successor-in-interest
to Boehringer Mannheim GmbH) to the Supply Agreement effective
as of March 5, 1998 between Gen-Probe Incorporated and
Boehringer Mannheim GmbH.*
|
|
10
|
.60(9)
|
|
Second Amendment dated August 31, 2004 between Gen-Probe
Incorporated and Roche Diagnostics (the
successor-in-interest
to Boehringer Mannheim GmbH) to the Supply Agreement effective
as of March 5, 1998 between Gen-Probe Incorporated and
Boehringer Mannheim GmbH.*
|
|
10
|
.61(30)
|
|
Third Amendment effective January 1, 2007 between Gen-Probe
Incorporated and Roche Diagnostics (the
successor-in-interest
to Boehringer Mannheim GmbH) to the Supply Agreement effective
as of March 5, 1998 between Gen-Probe Incorporated and
Boehringer Mannheim GmbH.*
|
|
10
|
.62(6)
|
|
License, Development and Cooperation Agreement dated
November 19, 2003 between Gen-Probe Incorporated and
DiagnoCure Inc.*
|
|
10
|
.63(17)
|
|
Amendment No. 1 to License, Development and Cooperation
Agreement effective May 24, 2006 between Gen-Probe
Incorporated and DiagnoCure, Inc.*
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.64(6)
|
|
Target License Agreement dated January 1, 2004 between
Gen-Probe Incorporated and Tosoh Corporation.*
|
|
10
|
.65(6)
|
|
TRC License Agreement dated January 1, 2004 between
Gen-Probe Incorporated and Tosoh Corporation.*
|
|
10
|
.66(6)
|
|
TMA License Agreement dated January 1, 2004 between
Gen-Probe Incorporated and Tosoh Corporation.*
|
|
10
|
.67(6)
|
|
Supply Agreement dated January 1, 2002 between Gen-Probe
Incorporated and MGM Instruments, Inc.*
|
|
10
|
.68(7)
|
|
Supply Agreement Amendment Number One dated June 4, 2004
between Gen-Probe Incorporated and MGM Instruments, Inc.*
|
|
10
|
.69(9)
|
|
License Agreement effective as of December 30, 2004 between
Gen-Probe Incorporated and AdnaGen AG.*
|
|
10
|
.70(9)
|
|
License Agreement effective as of December 31, 2004 between
Gen-Probe Incorporated and Corixa Corporation.*
|
|
10
|
.71(10)
|
|
Supply and Purchase Agreement effective February 15, 2005
between Gen-Probe Incorporated, F. Hoffman-La Roche
Ltd. and Roche Molecular Systems, Inc.*
|
|
10
|
.72(23)
|
|
Development Agreement for Panther Instrument System effective
November 22, 2006 between Gen-Probe Incorporated and
STRATEC Biomedical Systems AG.*
|
|
10
|
.73(23)
|
|
Supply Agreement for Panther Instrument System effective
November 22, 2006 between Gen-Probe Incorporated and
STRATEC Biomedical Systems AG.*
|
|
10
|
.74(23)
|
|
Letter Agreement regarding Development Agreement for Panther
Instrument System dated July 17, 2007 between Gen-Probe
Incorporated and STRATEC Biomedical Systems AG.*
|
|
10
|
.75
|
|
Amended and Restated Employment Agreement effective
November 18, 2008 by and between Gen-Probe Incorporated and
Henry L. Nordhoff.
|
|
10
|
.76(8)
|
|
Deferred Issuance Restricted Stock Conversion Agreement,
Deferred Issuance Award Agreement and Election Agreement
effective September 10, 2004 between Gen-Probe Incorporated
and Henry L. Nordhoff.
|
|
10
|
.77(10)
|
|
Amendment effective February 1, 2005 to Deferred Issuance
Restricted Stock Conversion Agreement, Deferred Issuance Award
Agreement and Election Agreement effective September 10,
2004 between Gen-Probe Incorporated and Henry L. Nordhoff.
|
|
10
|
.78(12)
|
|
Deferred Issuance Restricted Stock Award Grant Notice and
Agreement effective May 20, 2005 between Gen-Probe
Incorporated and Henry L. Nordhoff.
|
|
10
|
.79
|
|
Second Amendment dated October 31, 2008 to Deferred
Issuance Restricted Stock Conversion Agreement and Deferred
Issuance Restricted Stock Election Agreement between Gen-Probe
Incorporated and Henry L. Nordhoff.
|
|
10
|
.80(20)
|
|
Employment Offer Letter dated February 7, 2007 between
Gen-Probe Incorporated and Carl W. Hull.
|
|
10
|
.81(29)
|
|
Amended and Restated Employment Agreement effective
March 1, 2008 between Gen-Probe Incorporated and Carl W.
Hull.
|
|
10
|
.82
|
|
Amendment to Employment Agreement effective October 31,
2008, between Gen-Probe Incorporated and Carl W. Hull.
|
|
10
|
.83(22)
|
|
Agreement dated April 16, 2007 between Gen-Probe
Incorporated and Larry T. Mimms.
|
|
10
|
.84(11)
|
|
Employment Offer Letter effective July 15, 2005 between
Gen-Probe Incorporated and Stephen J. Kondor.
|
|
10
|
.85(24)
|
|
Employment Offer Letter between Gen-Probe Incorporated and
Christina Yang.
|
|
10
|
.86
|
|
Amendment to Offer Letter Agreement effective October 31,
2008, between Gen-Probe Incorporated and Christina Yang.
|
|
10
|
.87(26)
|
|
Employment Offer Letter effective October 30, 2007 between
Gen-Probe Incorporated and Jorgine Ellerbrock.
|
|
10
|
.88(22)
|
|
Form of Employment Agreement Executive Team
(executed by the following executive officers: D. Kacian, R.
Bowen, S. Kondor, H. Rosenman, D. De Walt, J. Ellerbrock and C.
Yang).
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.89(22)
|
|
Form of Employment Agreement Vice Presidents
(executed by the following officers: L. Arnold, P. Gargan,
R. Blake, T. Brach, F. Eibel and B. Hansen).
|
|
10
|
.90(22)
|
|
Form of First Amendment to Employment Agreement for Executive
Vice Presidents and Vice Presidents, effective March 1,
2007 (executed by the following officers: L. Arnold, R. Bowen,
D. De Walt, P. Gargan, D. Kacian, S. Kondor, H. Rosenman).
|
|
10
|
.91(31)
|
|
Form of Employment Agreement Executive Team as
approved in September 2008 (executed by the following executive
officers: E. Tardif and E. Lai).
|
|
10
|
.92(31)
|
|
Form of Employment Agreement Vice Presidents as
approved in September 2008 (executed by the following officers:
C. Giachetti and B. Phillips).
|
|
10
|
.93
|
|
Form of First Amendment to Employment Agreement effective
October 2008 (executed by the following officers: R. Blake, T.
Brach, F. Eibel, B. Hansen, J. Ellerbrock and C. Yang)
|
|
10
|
.94
|
|
Form of Second Amendment to Employment Agreement effective
October 2008 (executed by the following officers: L. Arnold, P.
Gargan, R. Bowen, D. De Walt, D. Kacian, S. Kondor and
H. Rosenman)
|
|
10
|
.95(2)
|
|
Form of Indemnification Agreement between Gen-Probe Incorporated
and its Executive Officers and Directors.
|
|
21
|
.1
|
|
List of subsidiaries of Gen-Probe Incorporated.
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
31
|
.1
|
|
Certification dated February 25, 2009, of Principal
Executive Officer required pursuant to 18 USC.
Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification dated February 25, 2009, of Principal
Financial Officer required pursuant to 18 USC.
Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certification dated February 25, 2009, of Principal
Executive Officer required pursuant to 18 USC.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
Certification dated February 25, 2009, of Principal
Financial Officer required pursuant to 18 USC.
Section 1350, as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
Filed herewith. |
|
|
|
Indicates management contract or compensatory plan, contract or
arrangement. |
|
* |
|
Gen-Probe has been granted confidential treatment with respect
to certain portions of this exhibit. |
|
** |
|
Gen-Probe has requested confidential treatment with respect to
certain portions of this exhibit. |
|
(1) |
|
Incorporated by reference to Gen-Probes Registration
Statement on Form 10 filed with the SEC on May 24,
2002. |
|
(2) |
|
Incorporated by reference to Gen-Probes Amendment
No. 2 to Registration Statement on Form 10 filed with
the SEC on August 14, 2002. |
|
(3) |
|
Incorporated by reference to Gen-Probes Amendment
No. 3 to Registration Statement on Form 10 filed with
the SEC on September 5, 2002. |
|
(4) |
|
Incorporated by reference to Gen-Probes Annual Report on
Form 10-K
filed with the SEC on March 24, 2003. |
|
(5) |
|
Incorporated by reference to Gen-Probes Quarterly Report
on
Form 10-Q
filed with the SEC on May 9, 2003. |
|
(6) |
|
Incorporated by reference to Gen-Probes Annual Report on
Form 10-K
filed with the SEC on March 9, 2004. |
|
(7) |
|
Incorporated by reference to Gen-Probes Quarterly Report
on
Form 10-Q
filed with the SEC on August 9, 2004. |
|
(8) |
|
Incorporated by reference to Gen-Probes Quarterly Report
on
Form 10-Q
filed with the SEC on November 9, 2004. |
|
(9) |
|
Incorporated by reference to Gen-Probes Annual Report on
Form 10-K
filed with the SEC on March 15, 2005. |
|
(10) |
|
Incorporated by reference to Gen-Probes Quarterly Report
on
Form 10-Q
filed with the SEC on May 10, 2005. |
|
(11) |
|
Incorporated by reference to Gen-Probes Report on
Form 8-K
filed with the SEC on August 1, 2005. |
|
|
|
(12) |
|
Incorporated by reference to Gen-Probes Quarterly Report
on
Form 10-Q
filed with the SEC on August 4, 2005. |
|
(13) |
|
Incorporated by reference to Gen-Probes Report on
Form 8-K
filed with the SEC on December 6, 2005. |
|
(14) |
|
Incorporated by reference to Gen-Probes Report on
Form 8-K
filed with the SEC on December 8, 2005. |
|
(15) |
|
Incorporated by reference to Gen-Probes Quarterly Report
on
Form 10-Q
filed with the SEC on May 5, 2006. |
|
(16) |
|
Incorporated by reference to Gen-Probes Report on
Form 8-K
filed with the SEC on April 2, 2008. |
|
(17) |
|
Incorporated by reference to Gen-Probes Quarterly Report
on
Form 10-Q
filed with the SEC on August 3, 2006. |
|
(18) |
|
Incorporated by reference to Gen-Probes Quarterly Report
on
Form 10-Q
filed with the SEC on November 1, 2006. |
|
(19) |
|
Incorporated by reference to Gen-Probes Report on
Form 8-K
filed with the SEC on February 14, 2007. |
|
(20) |
|
Incorporated by reference to Gen-Probes Report on
Form 8-K
filed with the SEC on February 14, 2007. |
|
(21) |
|
Incorporated by reference to Gen-Probes Annual Report on
Form 10-K
filed with the SEC on February 23, 2007. |
|
(22) |
|
Incorporated by reference to Gen-Probes Quarterly Report
on
Form 10-Q
filed with the SEC on May 1, 2007. |
|
(23) |
|
Incorporated by reference to Gen-Probes Quarterly Report
on
Form 10-Q
filed with the SEC on November 5, 2007. |
|
(24) |
|
Incorporated by reference to Gen-Probes Report on
Form 8-K
filed with the SEC on May 2, 2007. |
|
(25) |
|
Incorporated by reference to Gen-Probes Report on
Form 8-K
filed with the SEC on May 24, 2007. |
|
(26) |
|
Incorporated by reference to Gen-Probes Report on
Form 8-K
filed with the SEC on November 19, 2007. |
|
(27) |
|
Incorporated by reference to Gen-Probes Report on
Form 8-K
filed with the SEC on January 30, 2009. |
|
(28) |
|
Incorporated by reference to Gen-Probes Report on
Form 8-K
filed with the SEC on February 5, 2009. |
|
(29) |
|
Incorporated by reference to Gen-Probes Report on
Form 8-K
filed with the SEC on March 18, 2008. |
|
(30) |
|
Incorporated by reference to Gen-Probes Quarterly Report
on
Form 10-K
filed with the SEC on February 25, 2008. |
|
(31) |
|
Incorporated by reference to Gen-Probes Quarterly Report
on
Form 10-Q
filed on October 31, 2008. |
|
(32) |
|
Incorporated by reference to Gen-Probes Report on
Form 8-K
filed with the SEC on February 18, 2009. |