Gen-Probe Incorporated
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended March 31, 2008 |
OR
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Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 |
Commission File Number 001-31279
GEN-PROBE INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
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| Delaware
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33-0044608 |
| (State or other jurisdiction of
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(I.R.S. Employer |
| incorporation or organization)
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Identification Number) |
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| 10210 Genetic Center Drive |
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| San Diego, CA |
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| (Address of Principal Executive
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92121 |
| Offices)
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(Zip Code) |
(858) 410-8000
(Registrant’s Telephone Number, Including Area Code)
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 whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
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| Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of
April 28, 2008, there were 54,001,312 shares of the registrant’s common stock, par value
$0.0001 per share, outstanding.
GEN-PROBE INCORPORATED
TABLE OF CONTENTS
FORM 10-Q
2
GEN-PROBE INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
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March 31, |
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December 31, |
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2008 |
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2007 |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
46,299 |
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$ |
75,963 |
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Short-term investments |
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441,330 |
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357,531 |
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Trade accounts receivable, net of allowance for
doubtful accounts of $700 and $719 at March 31, 2008
and December 31, 2007, respectively |
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36,759 |
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32,678 |
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Accounts receivable — other |
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3,118 |
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11,044 |
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Inventories |
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50,448 |
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48,540 |
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Deferred income tax — short term |
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8,137 |
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8,825 |
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Prepaid income tax |
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— |
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2,390 |
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Prepaid expenses |
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14,056 |
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17,505 |
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Other current assets |
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6,056 |
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4,402 |
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Total current assets |
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606,203 |
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558,878 |
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Property, plant and equipment, net |
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142,662 |
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129,493 |
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Capitalized software, net |
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15,295 |
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15,923 |
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Goodwill |
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18,621 |
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18,621 |
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Deferred income tax — long term |
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7,942 |
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7,942 |
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License, manufacturing access fees and other assets, net |
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54,825 |
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58,196 |
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Total assets |
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$ |
845,548 |
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$ |
789,053 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
14,945 |
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$ |
11,777 |
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Accrued salaries and employee benefits |
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17,929 |
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20,997 |
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Other accrued expenses |
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4,977 |
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4,014 |
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Income tax payable |
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13,957 |
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846 |
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Deferred revenue — short term |
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2,957 |
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2,836 |
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Total current liabilities |
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54,765 |
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40,470 |
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Non-current income tax payable |
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4,341 |
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3,958 |
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Deferred income tax — long term |
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75 |
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75 |
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Deferred revenue — long term |
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4,441 |
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4,607 |
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Deferred rent |
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— |
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10 |
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Deferred compensation plan liabilities |
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2,348 |
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1,893 |
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Commitments and contingencies |
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Stockholders’ equity: |
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Preferred stock, $.0001 par value per share;
20,000,000 shares authorized, none issued and
outstanding |
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— |
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— |
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Common stock, $.0001 par value per share;
200,000,000 shares authorized, 53,992,269 and
53,916,298 shares issued and outstanding at March
31, 2008 and December 31, 2007, respectively |
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5 |
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5 |
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Additional paid-in capital |
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423,452 |
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415,229 |
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Accumulated other comprehensive income |
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2,974 |
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1,604 |
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Retained earnings |
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353,147 |
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321,202 |
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Total stockholders’ equity |
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779,578 |
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738,040 |
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Total liabilities and stockholders’ equity |
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$ |
845,548 |
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$ |
789,053 |
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See accompanying notes to consolidated financial statements.
3
GEN-PROBE INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
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Three Months Ended |
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March 31, |
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2008 |
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2007 |
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Revenues: |
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Product sales |
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$ |
101,507 |
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$ |
87,152 |
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Collaborative research revenue |
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2,459 |
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2,352 |
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Royalty and license revenue |
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18,597 |
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11,547 |
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Total revenues |
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122,563 |
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101,051 |
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Operating expenses: |
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Cost of product sales |
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32,636 |
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29,160 |
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Research and development |
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23,066 |
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20,258 |
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Marketing and sales |
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11,908 |
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9,536 |
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General and administrative |
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11,937 |
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11,281 |
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Total operating expenses |
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79,547 |
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70,235 |
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Income from operations |
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43,016 |
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30,816 |
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Interest income |
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4,207 |
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2,675 |
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Other income/(expense) |
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1,473 |
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(130 |
) |
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Total other income, net |
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5,680 |
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2,545 |
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Income before income tax |
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48,696 |
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33,361 |
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Income tax expense |
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16,751 |
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11,886 |
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Net income |
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$ |
31,945 |
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$ |
21,475 |
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Net income per share: |
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Basic |
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$ |
0.59 |
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$ |
0.41 |
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Diluted |
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$ |
0.58 |
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$ |
0.40 |
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Weighted average shares outstanding: |
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Basic |
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53,796 |
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52,170 |
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Diluted |
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55,023 |
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53,634 |
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See accompanying notes to consolidated financial statements.
4
GEN-PROBE INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Three Months Ended |
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March 31, |
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2008 |
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2007 |
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Operating activities |
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Net income |
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$ |
31,945 |
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$ |
21,475 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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8,608 |
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8,273 |
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Amortization of premiums on investments, net of accretion of discounts |
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1,735 |
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1,052 |
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Stock-based compensation charges |
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5,192 |
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5,105 |
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Stock option income tax benefits |
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369 |
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58 |
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Excess tax benefit from employee stock options |
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(145 |
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(1,284 |
) |
Gain on sale of stock holdings of Molecular Profiling Institute, Inc. |
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(1,600 |
) |
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— |
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Changes in assets and liabilities: |
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Accounts receivable |
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3,842 |
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(2,649 |
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Inventories |
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(1,796 |
) |
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(39 |
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Prepaid expenses |
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3,447 |
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(2,478 |
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Other current assets |
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(1,161 |
) |
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(1,354 |
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Other long term assets |
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(743 |
) |
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(598 |
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Accounts payable |
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3,181 |
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(1,549 |
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Accrued salaries and employee benefits |
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(3,069 |
) |
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(891 |
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Other accrued expenses |
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|
965 |
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(25 |
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Income tax payable |
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15,663 |
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|
7,815 |
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Deferred revenue |
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(45 |
) |
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(330 |
) |
Deferred income tax |
|
|
688 |
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|
106 |
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Deferred rent |
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(10 |
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(28 |
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Deferred compensation plan liabilities |
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454 |
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|
269 |
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Net cash provided by operating activities |
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67,520 |
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32,928 |
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Investing activities |
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Proceeds from sales and maturities of short-term investments |
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97,290 |
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14,819 |
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Purchases of short-term investments |
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(181,546 |
) |
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(65,863 |
) |
Purchases of property, plant and equipment |
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(20,033 |
) |
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(5,894 |
) |
Capitalization of intangible assets, including license and manufacturing access fees |
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(194 |
) |
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(1,817 |
) |
Sale of stock holdings of Molecular Profiling Institute, Inc. |
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4,100 |
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— |
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Other items, net |
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75 |
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(352 |
) |
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Net cash used in investing activities |
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(100,308 |
) |
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(59,107 |
) |
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Financing activities |
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Repurchase and retirement of restricted stock for payment of taxes |
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(41 |
) |
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— |
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Excess tax benefit from employee stock options |
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|
145 |
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|
1,284 |
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Proceeds from issuance of common stock |
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|
3,027 |
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|
4,402 |
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Net cash provided by financing activities |
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|
3,131 |
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|
|
5,686 |
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Effect of exchange rate changes on cash and cash equivalents |
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(7 |
) |
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16 |
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Net decrease in cash and cash equivalents |
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(29,664 |
) |
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(20,477 |
) |
Cash and cash equivalents at the beginning of period |
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|
75,963 |
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|
87,905 |
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Cash and cash equivalents at the end of period |
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$ |
46,299 |
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$ |
67,428 |
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See accompanying notes to consolidated financial statements.
5
Notes to the Consolidated Financial Statements (unaudited)
Note 1 — Summary of significant accounting policies
Basis of presentation
The accompanying interim consolidated financial statements of Gen-Probe Incorporated
(“Gen-Probe” or the “Company”) at March 31, 2008, and for the three month periods ended March 31,
2008 and 2007, are unaudited and have been prepared in accordance with United States generally
accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, they
do not include all of the information and footnotes required by U.S. GAAP for complete financial
statements. In management’s opinion, the unaudited consolidated financial statements include all
adjustments, consisting only of normal recurring accruals, necessary to state fairly the financial
information therein, in accordance with U.S. GAAP. Interim results are not necessarily indicative
of the results that may be reported for any other interim period or for the year ending December
31, 2008.
Certain prior year amounts have been reclassified to conform with the current year
presentation. In the fourth quarter of 2007, the Company began reporting the amortization of
premiums on investments, net of accretion of discounts, as an adjustment to reconcile net income to
net cash provided by operating activities on the consolidated statement of cash flows. These
amounts were previously reported as part of the proceeds from sales and maturities of short-term
investments under investing activities. This reclassification increased cash provided by operating
activities and decreased net cash used in investing activities for the three month period ended
March 31, 2007 by $1,052,000.
These unaudited consolidated financial statements and footnotes thereto should be read in
conjunction with the audited financial statements and footnotes thereto contained in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2007.
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”) and Molecular Light Technology Limited (“MLT”) and MLT’s subsidiaries.
Prior to the second quarter of 2007, MLT and its subsidiaries were consolidated into the Company’s
financial statements one month in arrears. During the second quarter of 2007, as part of MLT’s
integration onto the Company’s enterprise resource planning (“ERP”) system, the lag time between
reporting periods was eliminated. The effect of this change was immaterial to the Company’s
financial statements. All intercompany transactions and balances have been eliminated in
consolidation.
Use of estimates
The preparation of financial statements in conformity with 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 collectibility 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, income tax, and liabilities associated with employee benefit costs. Actual results
could differ from those estimates.
Foreign currencies
The functional currency for the Company’s wholly owned subsidiaries GP UK Limited and MLT and
its subsidiaries is the British pound. 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.”
6
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 its 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 Company’s collaboration agreement with Novartis, its 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
Company’s 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 amounts it charges for its diagnostic
assays. The Company has also implemented multi-year sales contracts that have an equipment factor
set forth in them. The depreciation costs associated with an instrument are charged to cost of
product sales on a straight-line basis over the estimated life of an instrument, which ranges from
three to five years; generally, three years for luminometers and DTS 400/800 instruments, and five
years for TIGRIS and DTS 800/1600 instruments. 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
Company’s instrument systems requires installation and training by the Company’s technical service
personnel. Generally, installation is a standard process consisting principally of uncrating,
calibrating, and testing the instrumentation.
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 product following commercial approval, the Company classifies sales of
these products as product sales in its financial statements.
The Company follows the provisions of Emerging Issues Task Force (“EITF”) Issue No. 00-21,
“Revenue Arrangements with Multiple Deliverables” (“EITF Issue No. 00-21”), 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 Company’s 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
7
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 Company’s
revenue recognition criteria are recorded as deferred revenue on the balance sheet.
Royalty revenue is recognized related to the sale or use of the Company’s 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.
Adoption of recent accounting pronouncements
SFAS No. 157
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157
provides guidance for using fair value to measure assets and liabilities. It also responds to
investors’ request 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 fiscal years beginning after November 15, 2007.
The Company adopted this statement for financial assets and liabilities measured at fair value
effective January 1, 2008. There was no financial statement impact as a result of adoption. In
accordance with the guidance of FASB Staff Position No. 157-2, 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 after November 15, 2008. The Company does not
anticipate adoption will have a material impact on its consolidated financial position, results of
operations or liquidity. See Note 4 for more information.
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”).
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 the first quarter of
2008, the Company did not elect fair value as an alternative measurement for any financial
instruments not previously carried at fair value.
8
EITF 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”). 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 financial statement
impact as a result of adoption.
Note 2 — Stock-based compensation
The following table summarizes the stock-based compensation expense that the Company recorded
in its statement of income for the three month periods ended March 31, 2008 and 2007 (in
thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
March 31, |
|
| |
|
2008 |
|
|
2007 |
|
Cost of product sales |
|
$ |
595 |
|
|
$ |
999 |
|
Research and development |
|
|
1,435 |
|
|
|
1,490 |
|
Marketing and sales |
|
|
695 |
|
|
|
548 |
|
General and administrative(1) |
|
|
2,467 |
|
|
|
2,068 |
|
|
|
|
|
|
|
|
Total |
|
$ |
5,192 |
|
|
$ |
5,105 |
|
|
|
|
|
|
|
|
(1) Includes amounts paid to members of the board of directors in the form of
restricted stock in lieu of cash as part of their annual retainer.
The Company used the following weighted average assumptions (annualized percentages) to
estimate the fair value of options granted and the shares purchased under the Company’s stock
option plans and employee stock purchase plan (“ESPP”) for the three month periods ended March 31,
2008 and 2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stock Options |
|
|
ESPP |
|
| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Risk-free interest rate |
|
|
2.8 |
% |
|
|
4.5 |
% |
|
|
3.3 |
% |
|
|
5.1 |
% |
Volatility |
|
|
35 |
% |
|
|
36 |
% |
|
|
34 |
% |
|
|
29 |
% |
Dividend yield |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Expected term (years) |
|
|
4.2 |
|
|
|
4.2 |
|
|
|
0.5 |
|
|
|
0.5 |
|
Resulting average fair value |
|
$ |
17.55 |
|
|
$ |
17.66 |
|
|
$ |
14.82 |
|
|
$ |
12.03 |
|
The Company’s unrecognized stock-based compensation expense, before income tax and adjusted
for estimated forfeitures, related to outstanding unvested share-based awards was approximately as
follows (in thousands, except number of years):
| |
|
|
|
|
|
|
|
|
| |
|
Weighted Average |
|
|
Unrecognized |
|
| |
|
Remaining Expense |
|
|
Expense as of |
|
| Awards |
|
Life (Years) |
|
|
March 31, 2008 |
|
Options |
|
|
1.8 |
|
|
$ |
45,793 |
|
ESPP |
|
|
0.2 |
|
|
|
81 |
|
Restricted stock |
|
|
1.5 |
|
|
|
9,323 |
|
Deferred issuance restricted stock |
|
|
1.4 |
|
|
|
1,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
57,070 |
|
|
|
|
|
|
|
|
|
At March 31, 2008, the Company had 248,585 shares of unvested restricted stock and
deferred issuance restricted stock from awards that had a weighted average grant date fair value of
$54.30 per share. The fair value of the 6,292 shares of restricted stock and deferred issuance
restricted stock that vested during the first three months of 2008 was approximately
$293,000.
9
Note 3 — 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 Company’s common stock
from the calculation of diluted net income per share because their effect is anti-dilutive.
The following table sets forth the computation of net income per share (in thousands, except
per share amounts):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
March 31, |
|
| |
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
31,945 |
|
|
$ |
21,475 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding — Basic |
|
|
53,796 |
|
|
|
52,170 |
|
Effect of dilutive common stock options outstanding |
|
|
1,227 |
|
|
|
1,464 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding — Diluted |
|
|
55,023 |
|
|
|
53,634 |
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.59 |
|
|
$ |
0.41 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.58 |
|
|
$ |
0.40 |
|
|
|
|
|
|
|
|
Dilutive securities include common stock options subject to vesting. Potentially dilutive
securities totaling 1,933,579 and 1,765,984 shares for the three month periods ended March 31, 2008
and 2007, respectively, were excluded from the calculation of diluted earnings per share because of
their anti-dilutive effect.
Note 4 — Fair value measurement
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 Company’s
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 instrument’s
categorization within the valuation hierarchy is based upon the lowest level of input that is
significant to the fair value measurement.
Determination of fair value
The Company measures fair value using the procedures set out below for all assets and
liabilities measured at fair value. When available, the Company generally uses quoted market prices
to determine fair value, and classifies such items in Level 1. If quoted market prices are not
available, fair value is based upon internally developed valuation techniques that use, where
possible, current market-based or independently sourced market parameters. 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 in Level 3 even though
there may be some significant inputs that are readily observable.
10
Following is a description of the Company’s 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:
Short-term investments
The short-term investments category on the Company’s consolidated balance sheets includes
available-for-sale debt and equity securities. The Company uses quoted market prices to determine
the fair value of all investment securities; such items are classified in Level 1 of the fair value
hierarchy. Examples include tax advantaged municipal securities.
The following table presents the financial instruments carried at fair value, by caption on
the consolidated balance sheet and by SFAS No. 157 valuation hierarchy (as described above) as of
March 31, 2008 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quoted prices |
|
|
Significant |
|
|
|
|
|
|
|
| |
|
in active |
|
|
other |
|
|
Significant |
|
|
Total carrying |
|
| |
|
markets for |
|
|
observable |
|
|
unobservable |
|
|
value in the |
|
| |
|
identical assets |
|
|
inputs |
|
|
inputs |
|
|
consolidated |
|
| |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
balance sheet |
|
Short-term investments |
|
$ |
441,330 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
441,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value |
|
$ |
441,330 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
441,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. 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
Company’s 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 in
Level 3 of the fair value hierarchy. The Company’s investment in Qualigen, which totaled $7.0
million as of March 31, 2008, is included in license, manufacturing access fees and other assets on
the consolidated balance sheet.
Note 5 — Balance sheet information
The following tables provide details of selected balance sheet items (in thousands):
Inventories
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
December 31, |
|
| |
|
2008 |
|
|
2007 |
|
Raw materials and supplies |
|
$ |
8,441 |
|
|
$ |
7,774 |
|
Work in process |
|
|
23,156 |
|
|
|
23,829 |
|
Finished goods |
|
|
18,851 |
|
|
|
16,937 |
|
|
|
|
|
|
|
|
|
|
$ |
50,448 |
|
|
$ |
48,540 |
|
|
|
|
|
|
|
|
11
Property, plant and equipment, net
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
December 31, |
|
| |
|
2008 |
|
|
2007 |
|
Land |
|
$ |
18,804 |
|
|
$ |
13,862 |
|
Building |
|
|
80,718 |
|
|
|
69,946 |
|
Machinery and equipment |
|
|
142,937 |
|
|
|
139,871 |
|
Building improvements |
|
|
33,303 |
|
|
|
32,614 |
|
Furniture and fixtures |
|
|
16,043 |
|
|
|
16,146 |
|
Construction in-progress |
|
|
114 |
|
|
|
181 |
|
|
|
|
|
|
|
|
Property, plant and equipment, at cost |
|
|
291,919 |
|
|
|
272,620 |
|
Less accumulated depreciation and amortization |
|
|
(149,257 |
) |
|
|
(143,127 |
) |
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
142,662 |
|
|
$ |
129,493 |
|
|
|
|
|
|
|
|
License, manufacturing access fees and other assets, net
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
December 31, |
|
| |
|
2008 |
|
|
2007 |
|
Patents |
|
$ |
17,498 |
|
|
$ |
17,304 |
|
Purchased intangible assets |
|
|
33,636 |
|
|
|
33,636 |
|
License and manufacturing access fees |
|
|
53,326 |
|
|
|
53,326 |
|
Investment in Molecular Profiling Institute, Inc. |
|
|
— |
|
|
|
2,500 |
|
Investment in Qualigen, Inc. |
|
|
6,993 |
|
|
|
6,993 |
|
Other assets |
|
|
4,161 |
|
|
|
3,911 |
|
|
|
|
|
|
|
|
License, manufacturing access fees and other assets, at cost |
|
|
115,614 |
|
|
|
117,670 |
|
Less accumulated amortization |
|
|
(60,789 |
) |
|
|
(59,474 |
) |
|
|
|
|
|
|
|
License, manufacturing access fees and other assets, net |
|
$ |
54,825 |
|
|
$ |
58,196 |
|
|
|
|
|
|
|
|
In January 2008, Caris Diagnostics completed the acquisition of Molecular Profiling Institute,
Inc. Pursuant to this sale transaction, the Company’s equity interest was converted into
approximately $4,400,000 of 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 Company’s 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.
Note 6 — Short-term investments
The Company’s short-term investments include tax advantaged municipals with a minimum Moody’s
credit rating of A3 and a minimum S&P credit rating of A-. As of March 31, 2008, the Company did
not hold auction rate securities. The Company’s investment policy limits an individual security
maturity to six years and an average portfolio maturity to three years. At March 31, 2008, the
Company’s portfolios had an average term of two years and an average credit quality of AA2 as
defined by Moody’s. The following is a summary of short-term investments as of March 31, 2008 (in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
| |
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
| |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
Municipal securities |
|
$ |
437,049 |
|
|
$ |
4,902 |
|
|
$ |
(621 |
) |
|
$ |
441,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the estimated fair values and gross unrealized losses for the
Company’s 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 as of March 31,
2008 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Less than 12 Months |
|
|
More than 12 Months |
|
| |
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
| |
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
Municipal securities |
|
$ |
83,655 |
|
|
$ |
(549 |
) |
|
$ |
9,534 |
|
|
$ |
(72 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized losses on the Company’s investments in municipal securities were caused by
market interest rate increases. The contractual terms of those investments do not permit the issuer
to settle the securities at a price less
12
than the amortized cost of the investment. The Company does not consider its investments in
municipal securities to be other-than-temporarily impaired at March 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 $318,000 and less than
$1,000 for the three month periods ended March 31, 2008 and 2007, respectively. Gross realized
losses from the sale of short-term investments were $0 for the three month periods ended March 31,
2008 and 2007.
Note 7 — Income tax
The Company currently estimates that its annual effective tax rate for 2008 will be
approximately 34% to 35%. This is an increase from the prior year effective tax rate of
approximately 23%, as the Company’s effective tax rate in 2007 significantly benefited from the
settlement of tax audits.
As of March 31, 2008, the Company had total gross unrecognized tax benefits of $4,980,000. The
amount of unrecognized tax benefits (net of the federal benefit for state taxes) that would
favorably affect the Company’s effective income tax rate, if recognized, was $3,944,000. The
Company’s U.S. federal tax returns for the 2005 and 2006 tax years are currently under audit.
Material filings subject to future examination are the Company’s California returns filed for the
2005 and 2006 tax years. The Company estimates that its accrual for unrecognized tax benefits will
decrease by $1,700,000 during the next twelve months as a result of tax audits expected to be
completed during this period.
Note 8 — Stockholders’ equity
Changes in stockholders’ equity for the three months ended March 31, 2008 were as follows (in
thousands):
| |
|
|
|
|
Balance at December 31, 2007 |
|
$ |
738,040 |
|
Net income |
|
|
31,945 |
|
Other comprehensive income, net |
|
|
1,370 |
|
Net proceeds from the issuance of common stock |
|
|
3,027 |
|
Purchase of common stock by board members |
|
|
30 |
|
Cancellation of restricted stock awards |
|
|
(60 |
) |
Repurchase and retirement of restricted stock for payment of taxes |
|
|
(41 |
) |
Stock-based compensation expense |
|
|
5,122 |
|
Tax benefit from the exercise of stock options |
|
|
145 |
|
|
|
|
|
Balance at March 31, 2008 |
|
$ |
779,578 |
|
|
|
|
|
Comprehensive income
In accordance with SFAS No. 130, “Reporting Comprehensive Income,” all components of
comprehensive income, including net income, are reported in the consolidated financial statements
in the period in which they are recognized. 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 Company’s wholly owned subsidiaries’ financial statements
and unrealized gains and losses on their available-for-sale securities, are reported, net of their
related tax effect, to arrive at comprehensive income.
Components of comprehensive income, net of income tax, were as follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
March 31, |
|
| |
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
31,945 |
|
|
$ |
21,475 |
|
|
|
|
|
|
|
|
Change in net unrealized gain on investments |
|
|
1,278 |
|
|
|
191 |
|
Foreign currency translation adjustment |
|
|
92 |
|
|
|
(108 |
) |
|
|
|
|
|
|
|
Other comprehensive income, net |
|
|
1,370 |
|
|
|
83 |
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
33,315 |
|
|
$ |
21,558 |
|
|
|
|
|
|
|
|
13
Stock options
A summary of the Company’s stock option activity for all option plans is as follows (in
thousands, except price per share data and number of years):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Aggregate |
|
| |
|
Number of |
|
|
Weighted Average |
|
|
Contractual |
|
|
Intrinsic |
|
| |
|
Shares |
|
|
Exercise Price |
|
|
Life (Years) |
|
|
Value |
|
Outstanding at December 31, 2007 |
|
|
5,518 |
|
|
$ |
40.86 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
28 |
|
|
|
56.09 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(83 |
) |
|
|
36.42 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
(71 |
) |
|
|
50.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2008 |
|
|
5,392 |
|
|
|
40.95 |
|
|
|
5.9 |
|
|
$ |
54,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2008 |
|
|
3,231 |
|
|
$ |
32.78 |
|
|
|
5.6 |
|
|
$ |
51,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company also had an aggregate of 210,669 shares of restricted stock and 80,000 shares of
deferred issuance restricted stock awards outstanding as of March 31, 2008 that have not been
reflected in the table above.
Note 9 — Contingencies
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.
Bayer Corporation (now Siemens Healthcare Diagnostics, Inc.)
In June 2006, the Company entered into a Short Form Settlement Agreement with Bayer HealthCare
LLC and Bayer Corp. (collectively, “Bayer”), to resolve patent litigation filed by the Company
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 the Company and Bayer were terminated
pursuant to the Settlement Agreement.
Pursuant to the terms of the Settlement Agreement, the Company dismissed the patent litigation
it filed against Bayer and granted Bayer immunity from suit for all current Bayer nucleic acid
diagnostic products. The Company also agreed not to assert four specified patents against future
Bayer products. Bayer granted the Company immunity from suit for the Company’s current TIGRIS
instrument and agreed not to assert certain specified Bayer patents against the Company’s future
instruments.
Pursuant to the Settlement Agreement, Bayer paid the Company an initial license fee of
$5,000,000 in August 2006. Bayer also paid the Company $10,300,000 as a one-time royalty on
January 31, 2007 and $16,400,000 as a one-time royalty on January 31, 2008. As a result of these
royalty payments, Bayer’s rights to the patents subject to the Settlement Agreement are fully
paid-up and royalty free.
Pursuant to the Settlement Agreement, the Company obtained certain contract and patent rights
to distribute qualitative human immunodeficiency virus (type 1), or HIV-1, and hepatitis C virus,
or HCV, tests through October 2010. The Company also obtained an option to extend its rights
through the life of certain HIV-1 and HCV patents. The option also permits the Company to elect to
extend its rights to future instrument systems (but not to the TIGRIS instrument). The Company is
required to exercise the option prior to the expiration of the existing rights in October 2010 and,
if exercised, pay a $1,000,000 fee.
14
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”). Digene’s 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. On July 13, 2007,
the ICDR arbitrators granted the Company’s 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 has been set
for October 2008.
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.
15
Item 2. Management’s 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. We assume no obligation to update any forward-looking
statements.
The following information should be read in conjunction with our March 31, 2008 consolidated
financial statements and related notes thereto included elsewhere in this quarterly report and with
our consolidated financial statements and notes thereto for the year ended December 31, 2007 and
the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
contained in our Annual Report on Form 10-K for the year ended December 31, 2007. We also urge you
to review and consider our disclosures describing various risks that may affect our business, which
are set forth under the heading “Risk Factors” in this quarterly report and in our Annual Report on
Form 10-K for the year ended December 31, 2007.
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 25 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 our
blood screening products that are used to detect the presence of
human immunodeficiency virus (type 1), or HIV-1, hepatitus 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 are responsible
for the research, development and manufacturing of our blood screening products, while Novartis is
responsible for marketing, sales, distribution and service of those products.
We are currently developing nucleic acid probe-based products that we hope to introduce in the
clinical diagnostic, blood screening and industrial microbiology testing markets, including
products for the detection of human papillomavirus, or HPV.
Recent Events
Financial Results
Product sales for the first quarter of 2008 were $101.5 million, compared to $87.2 million in
the same period of the prior year, an increase of 16%. Total revenues for the first quarter of 2008
were $122.6 million, compared to $101.1 million in the same period of the prior year, an increase
of 21%. Net income for the first quarter of 2008 was $31.9 million ($0.58 per diluted share),
compared to $21.5 million ($0.40 per diluted share) in the same period of the prior year, an
increase of 48%.
Corporate Collaborations
Millipore Corporation, or Millipore, recently launched the first assay developed under our
industrial testing collaboration. In January 2008, Millipore commenced commercialization of the
first MilliPROBE assay, 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.
16
Product Development
In March 2008, we started U.S. clinical trials for our investigational APTIMA assay to detect
HPV, which causes cervical cancer. The investigational APTIMA HPV assay is an amplified nucleic
acid test that detects 14 high-risk HPV types that are associated with cervical cancer. More
specifically, the assay detects two messenger RNAs (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. We expect to enroll approximately 7,000 women in the study. 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
current and future medium-throughput instrument platforms. Separately, we remain on track to
introduce our APTIMA HPV assay as a CE-marked product in Europe in the second half of 2008.
In May 2007, the Food and Drug Administration, or FDA, approved our Procleix TIGRIS system for
use with our Procleix Ultrio assay to 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. The system and assay
also detect HBV in blood donations that are HBV-positive based on serology tests for HBV surface
antigen and core antibodies. The system has not been approved at this time to screen donated blood
for HBV, as the initial clinical studies were not designed to, and did not, demonstrate HBV
“yield.” Yield is defined as HBV-infected blood donations that were intercepted by the Procleix
Ultrio assay, but that were initially negative based on the serology tests. We and Novartis have
initiated post-marketing studies to demonstrate HBV yield and gain the associated donor screening
claim. We believe we have met our goal of identifying two required yield cases in the studies,
although this must be confirmed through a regulatory submission to the FDA. We filed a supplemental
Biologic License Application, or BLA, with the FDA in February 2008 in hopes of gaining a donor
screening claim for HBV.
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 Settlement Agreement, Bayer paid us an initial license fee of $5.0 million in
August 2006. Bayer also 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,
Bayer’s 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 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.
17
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 financial
statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On
an ongoing basis, we evaluate our estimates, including those related to revenue recognition, the
collectibility of accounts receivable, valuation of inventories, long-lived assets, including
license and manufacturing access fees, patent costs and capitalized software, income tax and
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.
We believe there have been no significant changes during the first three months of 2008 to the
items that we disclosed as our critical accounting policies and estimates in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on
Form 10-K for the year ended December 31, 2007, except for the items discussed below.
Adoption of recent accounting pronouncements
SFAS No. 157
Effective January 1, 2008, we adopted Statement of Financial Accounting Standards, or
SFAS, No. 157, “Fair Value Measurements,” or SFAS No. 157, 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 instrument’s categorization
within the valuation hierarchy is based upon the lowest level of input that is significant to the
fair value measurement. At March 31, 2008, we reported $448.3 million of assets at fair value, of
which $7.0 million, or 1.6%, were classified in Level 3 of the fair value hierarchy.
Determination of fair value
When available, we generally use quoted market prices to determine fair value. If quoted
market prices are not available, fair value is based upon internally developed valuation techniques
that use, where possible, current market-based or independently sourced market parameters.
Following is a description of the Company’s 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.
18
Short-term investments
When available, we use quoted market prices to determine the fair value of all investment
securities.
Equity investment in private company
In 2006, we
invested in Qualigen, Inc., 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 accounting
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).
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,” or
SFAS No. 159, 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 the first quarter of 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 Emerging Issues Task Force, or EITF, Issue No. 07-3,
“Accounting for Non-Refundable Payments for Goods or Services Received for Use in Future Research
and Development Activities,” or EITF Issue No. 07-3. EITF Issue No. 07-3 requires that
nonrefundable 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 financial statement impact
as a result of adoption.
Results of Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in millions) |
|
Three Months Ended March 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Product Sales |
|
$ |
101.5 |
|
|
$ |
87.2 |
|
|
$ |
14.3 |
|
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenues |
|
|
83 |
% |
|
|
86 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. Our blood screening assays and
instruments 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
19
facilities located in countries where our products have obtained
governmental approvals. Blood screening product
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 the first quarter of 2008 compared to the same period of the prior year. The
increase was primarily attributed to $7.5 million in higher blood screening assay
sales, $5.0 million in higher APTIMA assay sales and $2.6 million in higher instrumentation sales,
partially offset by a $1.5 million decrease in PACE product sales as customers converted to the
more sensitive amplified APTIMA product line.
Diagnostic product sales, including assay, instrument, and ancillary sales, represented
$52.5 million, or 52% of product sales, in the first quarter of 2008, compared to $47.6 million, or
55% of product sales in the first quarter of 2007. This $4.9 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. The remaining growth in diagnostics was primarily the result of an
increase in diagnostic instrumentation sales, which increased by $0.7 million from first quarter
2007 levels. Overall APTIMA growth was partially offset by a $1.5 million decrease in our
PACE product 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 the first quarter of 2008, APTIMA sales were
approximately 85% of our STD product sales versus PACE sales of 15%. In the first quarter of 2007,
APTIMA represented 79% of STD product sales, and PACE 21%. Although overall dollar values have
moved noticeably to APTIMA, overall testing volumes for STDs were approximately 66% on APTIMA and
34% on PACE for the first quarter of 2008. Average pricing in the first quarter of 2008 related to
our APTIMA products decreased approximately 5% from first quarter 2007 level primarily related to
strong unit growth in our corporate account sector.
Blood screening related sales, including assay, instrument, and ancillary sales, represented
$49.0 million, or 48% of product sales, in the first quarter of 2008, compared to $39.6 million, or
45% of product sales in the first quarter of 2007. This $9.4 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. 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 the first quarter of 2008, United States blood donation volumes
screened using the Procleix bloodscreening family of assays were relatively consistent with 2007
levels, as was the related pricing. International revenues increased as the Procleix Ultrio product
further penetrated international markets.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in millions) |
|
Three Months Ended March 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Collaborative Research Revenue |
|
$ |
2.5 |
|
|
$ |
2.4 |
|
|
$ |
0.1 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenues |
|
|
2 |
% |
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We record revenues related to use of our blood screening products in the United States and
other countries in which the products have not received regulatory approval as collaborative
research revenue because of price restrictions applied to these products prior to FDA license
approval in the United States and similar approvals in foreign countries.
Under our collaboration agreement with Novartis, we are responsible for the research,
development and manufacturing of the blood screening products covered by the agreement, while
Novartis is responsible for marketing, sales, distribution and service of the blood screening
products worldwide.
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.
20
Collaborative research revenue increased 4% in the first quarter of 2008, compared to the same
period of the prior year. The increase was primarily the result of a $0.8 million increase in
funding from 3M for the development of rapid nucleic acid tests to detect certain dangerous
healthcare associated infections, such as methicillin-resistant Staphylococcus aureus and $0.9
million in higher billings to Novartis related to the development of the Procleix Ultrio assay.
These increases were mostly offset by $0.6 million in lower funding revenues from the United States
Army Medical Research and Material Command for PCA3 as that contract expired in the fourth quarter
of 2007.
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. Under the
terms of our collaboration agreement with Novartis, a milestone payment of $10.0 million is due to
us in the future if we obtain full FDA approval of our Procleix Ultrio assay for blood screening
use on our TIGRIS instrument. Also, we may receive additional milestone payments from 3M based upon
achievement of technological and commercial milestones under our healthcare associated infection
collaboration. There is no guarantee we will achieve these milestones and receive the associated
payments under these agreements.
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.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in millions) |
|
Three Months Ended March 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Royalty and License Revenue |
|
$ |
18.6 |
|
|
$ |
11.5 |
|
|
$ |
7.1 |
|
|
|
62 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenues |
|
|
15 |
% |
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 in the first quarter of each of 2008 and
2007 consisted
primarily of settlement payments received from Bayer ($10.3 million in 2007 and $16.4 million in
2008). Bayer has now paid all amounts due to us under our settlement agreement, and thus
these payments will not recur in future periods. The increase in royalty and license revenue
during the first quarter of 2008, compared to the same period of the prior year, was also the
result of $0.9 million in higher blood plasma royalties from Novartis.
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 market and capitalize on our technologies.
We may not be able to do so and future royalty and license revenue may decline.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in millions) |
|
Three Months Ended March 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Cost of Product Sales |
|
$ |
32.6 |
|
|
$ |
29.2 |
|
|
$ |
3.4 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit margin as a percent of product sales |
|
|
68 |
% |
|
|
67 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
21
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 research and development, or 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 product sales increased 12% in the first quarter of 2008, compared to the same period
of the prior year. The increase was principally attributed to a $2.3 million increase related to
instrument shipments, a $2.2 million increase related to shipments of Procleix Ultrio, a $1.3
million increase related to APTIMA shipments, partially offset by changes in production volumes of
$1.8 million, and a $0.6 million decrease in the manufacturing scrap provision.
Our gross profit margin as a percentage of product sales increased to 68% in the first quarter
of 2008, from 67% in the first quarter of 2007. The increase in gross profit margin percentage in
the first quarter of 2008 was principally attributed to increased sales of higher margin Procleix
Ultrio and WNV assays, changes in production volumes and lower scrap provisions, partially offset
by increased instrument sales.
A portion of our blood screening revenues is from sales of TIGRIS instruments to Novartis,
which totaled $4.1 million and $2.0 million during the first quarter of 2008 and 2007,
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.
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.
We anticipate that our blood screening customers’ requirements for smaller pool sizes or
ultimately individual donor testing of blood samples will result in lower gross margin percentages,
as additional tests will be required to deliver the sample results. We are not able to accurately
predict the timing and extent to which our gross margin percentage will be negatively affected as a
result of smaller pool sizes or individual donor testing, which depends on associated price
changes. 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, especially in emerging markets where pricing is less than developed
markets.
22
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in millions) |
|
Three Months Ended March 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Research and Development |
|
$ |
23.1 |
|
|
$ |
20.3 |
|
|
$ |
2.8 |
|
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenues |
|
|
19 |
% |
|
|
20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 the manufacture of development lots and clinical trial lots
for our blood screening products, further development of our TIGRIS instrument, initial development
of a fully automated system for low and mid-volume laboratories, as well as for the development of
assays for PCA3, HPV, healthcare associated infections and for industrial applications; however, we
expect our R&D expenses as a percentage of total revenues to decline in future years.
R&D expenses increased 14% in the first quarter of 2008, compared to the same period of the
prior year. The increase was primarily due to a $1.0 million increase in spending for development
lot activity primarily for HPV, a $0.9 million increase in salaries and personnel-related expenses
and $0.9 million in higher professional fees associated with post-marketing studies of the Procleix
Ultrio assay in the United States.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in millions) |
|
Three Months Ended March 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Marketing and Sales |
|
$ |
11.9 |
|
|
$ |
9.5 |
|
|
$ |
2.4 |
|
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenues |
|
|
10 |
% |
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our marketing and sales expenses include salaries and other personnel-related expenses,
promotional expenses, and outside services. Marketing and sales expenses increased 25% in the first
quarter of 2008, compared to the same period of the prior year. The increase was primarily due to a
$1.2 million increase in salaries and personnel-related expenses and $0.4 million in increased
spending for marketing studies and promotional activities related to both our HPV and PCA3 products
in the EU.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in millions) |
|
Three Months Ended March 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
General and Administrative |
|
$ |
11.9 |
|
|
$ |
11.3 |
|
|
$ |
0.6 |
|
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenues |
|
|
10 |
% |
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our general and administrative, or G&A, expenses include salaries and other personnel-related
expenses for finance, legal, strategic planning and business development, public relations and
human resources, as well as professional fees for legal, patents and auditing services. G&A
expenses increased 5% in the first quarter of 2008, compared to the
same period of the prior year.
The increase was primarily the result of a $1.1 million increase in professional fees, primarily
legal fees, and a $0.9 million increase in salaries and personnel-related expenses, partially
offset by a $0.5 million increase in benefits expense allocated to other departments and a $0.4
million decrease in recruiting and relocation expenses.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in millions) |
|
Three Months Ended March 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Interest Income |
|
$ |
4.2 |
|
|
$ |
2.6 |
|
|
$ |
1.6 |
|
|
|
62 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income / (Expense) |
|
|
1.5 |
|
|
|
(0.1 |
) |
|
|
1.6 |
|
|
|
N/M |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income / (Expense), net |
|
$ |
5.7 |
|
|
$ |
2.5 |
|
|
$ |
3.2 |
|
|
|
128 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The $1.6 million increase in interest income in the first quarter of 2008 from the comparable
period of 2007 was primarily a result of higher average balances of our short-term investments and
higher yields on our investment portfolio. The $1.6 million net increase in other income was
related to a one-time gain on the sale of our investment in Molecular Profiling Institute, Inc.
23
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in millions) |
|
Three Months Ended March 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Income Tax Expense |
|
$ |
16.8 |
|
|
$ |
11.9 |
|
|
$ |
4.9 |
|
|
|
41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of income before tax |
|
|
34 |
% |
|
|
36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense increased to $16.8 million, or 34% of pretax income, in the first quarter
of 2008, from $11.9 million, or 36% of pretax income, in the first quarter of 2007. The decrease in
our effective tax rate in the first quarter was largely the result of higher tax-exempt interest in
the current year and lower accruals for interest expense related to uncertain tax positions.
Liquidity and capital resources
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
December 31, |
|
| |
|
2008 |
|
|
2007 |
|
| |
|
(In thousands) |
|
Cash, cash equivalents and short-term investments |
|
$ |
487,629 |
|
|
$ |
433,494 |
|
Working capital |
|
$ |
551,438 |
|
|
$ |
518,408 |
|
Current ratio |
|
|
11:1 |
|
|
|
14:1 |
|
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 bonds with a minimum Moody’s credit rating of A3 and a
minimum S&P credit rating of A-. As of March 31, 2008, we did not hold auction rate
securities. Our investment policy limits an individual security maturity to six years and
an average portfolio maturity to three years. At March 31, 2008,
our portfolios had an average term of two years and an average credit quality of AA2 as defined by Moody’s.
Our working capital at March 31, 2008, increased $33.0 million from December 31, 2007,
primarily due to growth in our overall business. Days’ sales outstanding, or DSO, increased to 34
days at March 31, 2008 from 31 days at December 31, 2007, mainly due to increased sales to
Novartis. Days’ sales in inventory decreased to 138 days at March 31, 2008 from 153 days at
December 31, 2007 due to increased cost of product sales for the period ended March 31, 2008
related to higher sales volume.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
March 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
$ Change |
|
| |
|
(In thousands) |
|
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
67,520 |
|
|
$ |
32,928 |
|
|
$ |
34,592 |
|
Investing activities |
|
|
(100,308 |
) |
|
|
(59,107 |
) |
|
|
41,201 |
|
Financing activities |
|
|
3,131 |
|
|
|
5,686 |
|
|
|
(2,555 |
) |
Purchases of property,
plant and equipment
(included in investing
activities above) |
|
$ |
(20,033 |
) |
|
$ |
(5,894 |
) |
|
$ |
14,139 |
|
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 TIGRIS instruments for placement with our customers. Certain R&D costs may be funded
under collaboration agreements with partners.
The $34.6 million increase in net cash provided by operating activities during the first
quarter of 2008 compared to the same period of the prior year was primarily due to $10.5 million in
higher net income, a $8.9 million decrease in accounts receivable other due to collections from our
collaborative partners, a $5.9 million decrease in prepaid expenses related to upfront fees paid in
the first quarter of 2007 for the purchase of TIGRIS instruments, a $7.8 million increase in income
tax payable due to the timing of tax payments and lower stock option tax deductions in
24
the current
year, and a $4.7 million increase in accounts payable balances, offset by a $2.4 million increase
in trade accounts receivable due to overall increased sales combined with higher DSO.
Our investing activities consisted primarily of property, plant and equipment expenditures,
and purchases of short-term investments. The $41.2 million increase in net cash used in investing
activities during the first quarter of 2008 compared to the same period of the prior year was
principally attributed to a $33.2 million increase in purchases (net of sales) of short-term
investments and a $14.1 million increase in capital expenditures. These outflows were offset by
$4.1 million in proceeds received for our equity interest in Molecular Profiling Institute, Inc. as
a result of its acquisition by Caris Diagnostics and a $1.6 million decrease in license and
manufacturing access fees paid to Corixa in the first quarter of 2007. The increase in purchases of
short-term investments was driven by the reinvestment of excess cash generated by operating
activities, as well as proceeds from the exercise of stock options. For 2008, we expect spending
for capital equipment and information technology to decrease from 2007 spending.
We receive cash from the exercise of employee stock options and proceeds from the sale of
stock pursuant to the employee stock purchase plan, or ESPP. The $2.6 million decrease in net cash
provided by financing activities during the first quarter of 2008 compared to the same period of
the prior year was principally attributed to a $1.4 million decrease in proceeds from the exercise
of stock options and the associated $1.1 million decrease in excess tax benefits. 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 bank’s prime rate, or at LIBOR plus 1.0%. At March 31, 2008, we did not have any amounts
outstanding under the bank line and we have not taken advances against the line since inception.
The line of credit agreement requires us to comply with various financial and restrictive
covenants. As of March 31, 2008, we were in compliance with all covenants.
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. In August 2003, we filed a Form S-3 shelf
registration statement with the U.S. Securities and Exchange Commission, or SEC, relating to the
possible future sale of up to an aggregate of $150 million of debt or equity securities. To date,
we have not raised any funds under this registration statement.
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.
Contractual obligations and commercial commitments
Our contractual obligations due for purchase commitments, collaborative agreements and supply
agreements as of March 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) |
|
$ |
17,468 |
|
|
$ |
15,811 |
|
|
$ |
1,657 |
|
|
$ |
— |
|
|
$ |
— |
|
Collaborative commitments (2) |
|
|
10,755 |
|
|
|
2,805 |
|
|
|
7,000 |
|
|
|
450 |
|
|
|
500 |
|
Supply agreements (3) |
|
|
10,000 |
|
|
|
10,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (4) |
|
$ |
38,223 |
|
|
$ |
28,616 |
|
|
$ |
8,657 |
|
|
$ |
450 |
|
|
$ |
500 |
|
|
|
|
| (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 $17.5 million total,
$13.1 million is expected to be used to purchase TIGRIS instruments, of which we anticipate
that approximately $8.7 million of these instruments will be sold to Novartis. Not included in
the $17.5 million is $11.4 million expected to be used to |
25
|
|
|
| |
|
purchase prototype, 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 $10.1 million in milestone payments, plus royalties on net sales of
any products using specified technology. |
| |
| (3) |
|
Amount reflected relates to our obligations under our supply and purchase agreement
with Roche Molecular Systems. We are obligated to pay $10.0 million to Roche upon the
occurrence of certain future commercial events, but not later than December 1, 2008. |
| |
| (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 our blood screening assay to Novartis, and Novartis is obligated to
purchase all of the quantities of this assay 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. |
Liabilities associated with uncertain tax positions, currently estimated at $5.4 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 $4.1
million at March 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.
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.
Available Information
Copies of our public filings are available on our Internet website at http://www.gen-probe.com
as soon as reasonably practicable after we electronically file such material with, or furnish them
to, the SEC.
Item 3. 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 in the United Kingdom
is the British pound. Accordingly, the accounts of these operations are translated from the British
pound to the United States dollar using the current exchange rate in effect at the balance sheet
date for the balance sheet accounts, and using the average exchange rate during the period for
revenue and expense accounts. The effects of translation are recorded in “accumulated other
comprehensive income” as a separate component of stockholders’ equity.
26
We are exposed to foreign exchange risk for expenditures in certain foreign countries, but the
total receivables and payables denominated in foreign currencies as of March 31, 2008 were not
material. 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. We do not enter into
foreign currency hedging transactions to mitigate our exposure to foreign currency exchange risks.
Based on international blood screening product sales during the first quarter of 2008, a 10%
movement of currency exchange rates would result in a blood screening product sales increase or
decrease of approximately $5.9 million annually. We believe that our business operations are not
exposed to market risk relating to commodity prices.
Item 4. Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, 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 the quarter ended March 31, 2008.
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 has included certain internal control areas in which we have
made and are continuing to make changes to improve and enhance controls.
There have been no changes in our internal control over financial reporting during the quarter
ended March 31, 2008 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
We maintain disclosure controls and procedures and internal controls that are designed to
ensure that information required to be disclosed in our current and periodic reports is recorded,
processed, summarized and reported within the time periods specified in the SEC’s 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 and
internal controls, 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 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, controls 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.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
A description of our material pending legal proceedings is disclosed in Note 9 —
Contingencies, of the Notes to Consolidated Financial Statements included in Item 1 of Part I of
this report and is incorporated by reference herein. We are also engaged in other legal actions
arising in the ordinary course of our business and believe that the ultimate outcome of these
actions 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. If any of these matters were resolved in a manner unfavorable
to us, our business, financial condition and results of operations would be harmed.
Item 1A. Risk Factors
The following information sets forth facts that could cause our actual results to differ
materially from those contained in forward-looking statements we have made in this Quarterly Report
and those we may make from time to time. We have marked with an asterisk those risk factors that
reflect substantive changes from the risk factors included in our Annual Report on Form 10-K for
the year ended December 31, 2007.
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 and the sales
cycles accurately. In addition, we base our internal projections of our 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.
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 our blood screening products and Siemens to distribute some
of our clinical diagnostic products for the detection of viral microorganisms. Commercial product
sales to Novartis accounted for 40% of our total revenues for the first quarter of 2008 and 43% of
total revenues for 2007. As of March 31, 2008, we believe our collaboration agreement with Novartis
will terminate in 2013. The collaboration agreement may be extended by the mutually agreed
development of new products under the agreement, in which case the agreement will expire upon the
later of the end of the original term or five years after the first commercial sale of the last new
product developed during the original term.
In February 2001, we commenced an arbitration proceeding against Chiron (now Novartis) in
connection with our blood screening collaboration. The arbitration was resolved by mutual agreement
in December 2001. In the event that we or Novartis commence arbitration against each other in the
future under the collaboration agreement,
proceedings could delay or decrease our receipt of revenue from Novartis or otherwise disrupt
our collaboration with Novartis, which could cause our revenues to decrease and our stock price to
decline.
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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 arbitrator’s 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
arbitrator’s June 5, 2005 Interim Award. The arbitrator determined that the collaboration agreement
be terminated, as we requested, except as to the qualitative HCV assays and as to quantitative ASRs
for HCV. As Bayer’s 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 arbitrator’s 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, Rebio
Gen, Inc. 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, and we are unable to renew or enter into an alternative
agreement, 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.
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 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.
The continuation of any of our collaboration agreements depends on their periodic renewal by
us and our collaborators. For example, we believe our collaboration agreement with Novartis will
terminate in 2013. The collaboration agreement may be extended by the mutually agreed development
of new products under the agreement, in which case the agreement will expire upon the later of the
end of the original term or five years after the first commercial sale of the last new product
developed during the original term. The collaboration agreement is also subject to termination
prior to expiration upon a material breach by either party to the agreement.
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
29
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.
If our TIGRIS instrument reliability does not meet market expectations, we may be unable to retain
our existing customers and attract new customers.
Complex diagnostic instruments such as our TIGRIS instrument typically require operating and
reliability improvements following their introduction. We have an active in-service reliability
improvement program for our TIGRIS instrument. However, this program may not result in the desired
improvements in operating reliability of the instrument. Additionally, failure to resolve
reliability issues could limit market acceptance of the instrument, adversely affect our
reputation, and prevent us from retaining our existing customers or attracting new customers.
Our future success will depend in part upon our ability to enhance existing products and to
develop and introduce 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.
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 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.
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
30
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 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
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
Abbott and Siemens with respect to immunoassay products. In the future, our blood screening
products also 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. Bayer’s
rights have now been assigned to Siemens as part of Bayer’s 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
31
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.
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 may not be able to obtain supplies from replacement
suppliers on a timely or cost-effective basis or not 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. 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
DNA oligonucleotides for human papillomavirus 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 the 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. Digene’s 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. 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.
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.
32
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 addition, we
are 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 FDA’s 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 FDA’s 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 the PCA3 mRNA and for use in the detection
of the parasite Trichomonas vaginalis. 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.
We understand the FDA is in the process of drafting guidelines for ASRs and these guidelines may
result in the FDA limiting the types of products that can be sold as ASRs. Should the FDA modify
the ASR rules or its interpretation and enforcement of them in a fashion that makes it difficult or
impossible for us to market some or all of our products, 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 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 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.
33
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. Our products may
be subject to additional recalls in the future. Although none of our past product recalls had a
material adverse impact on our business, a future government-mandated recall, or a voluntary recall
by us, 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 and individual donor testing.
We currently receive revenues from the sale of our 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 our blood screening assays 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.
The blood screening market is transitioning from pooled testing of large numbers of donor
samples to smaller pool sizes and, we expect, will ultimately move to individual donor testing. A
greater number of tests will be required for smaller pool sizes and individual donor testing than
are now required. Under our collaboration agreement with Novartis, we bear the cost of
manufacturing our blood screening assays. The greater number of tests required for smaller pool
sizes and individual donor testing 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 the adoption of smaller pool sizes and
individual donor testing. 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 and
individual donor testing, because we do not know the ultimate selling price that Novartis would
charge to the end user.
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 43% of our total revenues for the first quarter of 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 America’s 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 the first quarter of 2008. Various state
and city public health agencies accounted for an aggregate of 7% of our total revenues in the first
quarter of 2008 and 9% of total revenues for the fiscal year 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 450 United
States and foreign patents covering our products
34
and technologies as of March 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 16, 2024 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, continuing 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 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 agreements may conflict with, or be subject to, the
rights of third parties 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 management’s 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 disputes with third parties. Our patent
disputes with Bayer were resolved by settlement agreement in August 2006. In December 2006, Digene
Corporation filed a demand for binding arbitration against Roche with the International Centre for
Dispute Resolution of the American Arbitration Association in New York. Digene’s 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
35
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 in this matter has been set for October 2008.
We hold certain rights in the blood screening and clinical diagnostics fields under patents
originally issued to Chiron (now Novartis) covering the detection of HIV. 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 Chiron
(now Novartis). The first interference was between Novartis and the National Institutes of Health,
or the NIH, and Centocor, Inc., and pertains to Centocor’s 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 pertains to Institut Pasteur’s 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
filed actions in the United States District Court for the District of Columbia challenging the
decisions of the Patent and Trademark Office. On March 28, 2008, the parties notified the court
that they had reached an agreement in principle to resolve the litigation and had signed a
memorandum of understanding prior to the negotiation of final, definitive settlement documents.
The terms of the tentative settlement were not disclosed. As a result of the settlement, Institut
Pasteur and/or NIH may obtain patent rights covering the detection of HIV and those patent rights
may cover our HIV tests. There can be no assurances as to the ultimate outcome of this matter.
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 March 31, 2008, we had approximately $231.4 million of long-lived assets, including
$15.3 million of capitalized software, net of accumulated amortization, relating to our TIGRIS
instrument, goodwill of $18.6 million, a $7.0 million investment in Qualigen, Inc., and
$47.8 million of capitalized license and manufacturing access fees, patents, purchased intangibles
and other long term assets. Additionally, we had $76.7 million of land and buildings, $16.9 million
of tenant improvements, $0.1 million of construction in-progress and $49.0 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.
36
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 our
blood screening and clinical diagnostic products and our TIGRIS instrument. 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.
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, 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 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.
We must manufacture or have manufactured our products 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 as we attempt to scale-up our manufacturing of a
new product, and we may not achieve
37
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.
Our 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 22% of our total revenues for
the first quarter of 2008 and 20% of our total revenues for 2007. Sales by Novartis of our blood
screening products outside of the United States accounted for 78% of our international revenues in
the first quarter of 2008 and 77% in fiscal year 2007. Novartis has responsibility for the
international distribution of our blood screening products.
We encounter risks inherent in international operations. We expect a significant portion of
our sales growth, especially with respect to our blood screening products, to come from expansion
in international markets. If the value of 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:
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the imposition of government controls, |
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• |
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export license requirements, |
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• |
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economic and political instability, |
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• |
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price controls, |
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• |
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trade restrictions and tariffs, |
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• |
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differing local product preferences and product requirements, and |
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• |
|
changes in foreign medical reimbursement and coverage policies and programs. |
In addition, we anticipate that requirements for smaller pool sizes or ultimately individual
donor testing 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.
38
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 also may 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 license. Diagnocure Inc., from whom we have an exclusive license to the PCA3 gene marker
for prostate cancer, recently 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
Diagnocure’s assertion and we have commenced discussions 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.
39
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. The position of Vice President, Research
and Development has been vacant since April 2007.
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.
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.
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, and we may not realize the anticipated
benefits of any acquisition, technology license or strategic alliance.
Managing any future acquisitions will entail numerous operational and financial risks,
including:
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• |
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the inability to retain or replace key employees of any acquired businesses or hire
enough qualified personnel to staff any new or expanded operations; |
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• |
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the impairment of relationships with key customers of acquired businesses due to changes
in management and ownership of the acquired businesses; |
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• |
|
the exposure to federal, state, local and foreign tax liabilities in connection with any
acquisition or the integration of any acquired businesses; |
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• |
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the exposure to unknown liabilities; |
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• |
|
higher than expected acquisition and integration costs that could cause our quarterly and
annual operating results to fluctuate; |
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• |
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increased amortization expenses if an acquisition includes significant intangible assets; |
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• |
|
combining the operations and personnel of acquired businesses with our own, which could
be difficult and costly; and |
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• |
|
integrating or completing the development and application of any acquired technologies,
which could disrupt our business and divert our management’s 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
40
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.
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 our 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 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:
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divide our board of directors into three classes, with members of each class to be
elected for staggered three-year terms, |
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limit the right of stockholders to remove directors, |
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regulate how stockholders may present proposals or nominate directors for election at
annual meetings of stockholders, and |
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• |
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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.
41
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. As a part of this effort, we are transitioning data and changing 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 estimates we
receive from our 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.
42
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
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Total Number |
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|
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of Shares |
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Purchased |
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Approximate |
|
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as Part of |
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Dollar Value of |
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Publicly |
|
|
Shares that May |
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Total Number |
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Average |
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Announced |
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Yet Be Purchased |
|
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of Shares |
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Price Paid |
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|
Plans or |
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Under the Plans or |
|
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Purchased |
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Per Share |
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|
Programs |
|
|
Programs |
|
January 1-31, 2008 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
February 1-29, 2008 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
March 1-31, 2008 |
|
|
863 |
|
|
|
47.81 |
|
|
|
— |
|
|
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— |
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Total |
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|
863 |
(1) |
|
$ |
47.81 |
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|
|
— |
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|
$ |
— |
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|
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| (1) |
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During the first quarter of 2008, we repurchased and retired 863 shares of our
common stock, at an average per share price of $47.81, 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 and deferred issuance restricted stock. As of March 31, 2008, we had an
aggregate of 209,669 shares of restricted stock and 80,000 shares of deferred issuance
restricted stock awards outstanding. |
43
Item 6. Exhibits
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| Exhibit |
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| Number |
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Description |
3.1(1)
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Form of Amended and Restated Certificate of Incorporation of Gen-Probe Incorporated. |
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3.2(2)
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Certificate of Amendment of Amended and Restated Certificate of Incorporation of Gen-Probe
Incorporated. |
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3.3(3)
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Form of Amended and Restated Bylaws of Gen-Probe Incorporated. Series A Junior Participating |
|
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3.4(4)
|
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Certificate of Elimination of the Preferred Stock of Gen-Probe Incorporated. |
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4.1(1)
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Specimen common stock certificate. |
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31.1†
|
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Certification dated April 30, 2008, of Principal Executive Officer required pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2†
|
|
Certification dated April 30, 2008, of Principal Financial Officer required pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1†
|
|
Certification dated April 30, 2008, of Principal Executive Officer required pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2†
|
|
Certification dated April 30, 2008, of Principal Financial Officer required pursuant to 18
U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
| † |
|
Filed herewith. |
| |
| * |
|
Gen-Probe has requested confidential treatment with respect to certain portions of this
exhibit. |
| |
| (1) |
|
Incorporated by reference to Gen-Probe’s Amendment No. 2 to Registration Statement on Form 10
filed with the SEC on August 14, 2002. |
| |
| (2) |
|
Incorporated by reference to Gen-Probe’s Quarterly Report on Form 10-Q filed with the SEC on
August 9, 2004. |
| |
| (3) |
|
Incorporated by reference to Gen-Probe’s Report on Form 8-K filed with the SEC on February
14, 2007. |
| |
| (4) |
|
Incorporated by reference to Gen-Probe’s Annual Report on Form 10-K for the year ended
December 31, 2006 filed with the SEC on February 23, 2007. |
44
SIGNATURES
Pursuant to the requirements of the Securities and 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
|
|
| DATE: April 30, 2008 |
By: |
/s/ Henry L. Nordhoff
|
|
| |
|
Henry L. Nordhoff |
|
| |
|
Chairman and Chief Executive Officer
(Principal Executive Officer) |
|
| |
| |
|
|
| DATE: April 30, 2008 |
By: |
/s/ Herm Rosenman
|
|
| |
|
Herm Rosenman |
|
| |
|
Senior Vice President — Finance and
Chief Financial Officer (Principal Financial
Officer and Principal
Accounting Officer) |
|
| |
45