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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended December 31, 2005 | ||
| or | ||
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from to | ||
Commission file number: 001-31279
Gen-Probe Incorporated
(Exact name of registrant as specified in its charter)
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Delaware
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33-0044608 | |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
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10210 Genetic Center Drive, San Diego, CA (Address of principal executive office) |
92121-4362 (Zip Code) |
Registrant’s telephone number, including area code:
(858) 410-8000
Securities registered pursuant to Section 12(b) of the
Act:
| Title of Each Class | Name of Each Exchange on Which Registered | |
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None
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None |
Securities to be registered pursuant to Section 12(g) of
the Act:
Common Stock, par value $.0001 per share
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No
o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K is
not contained herein, and will not be contained, to the best of
the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K or any
amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer or a non-accelerated
filer. See definition of “accelerated filer” and
“large accelerated filer” in
Rule 12b-2 of the
Exchange Act. (Check one):
Large Accelerated
Filer þ Accelerated
Filer o Non-Accelerated
Filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Act). Yes o No þ
As of June 30, 2005, the last business day of the
registrant’s most recently completed second fiscal quarter,
the aggregate market value of the registrant’s common stock
held by non-affiliates of the registrant was approximately
$1.5 billion, based on the closing price of the
registrant’s common stock on the Nasdaq National Market on
that date. Shares of common stock held by each officer and
director and by each person who owns 10 percent or more of
the outstanding common stock have been excluded because these
persons may be considered affiliates. This determination of
affiliate status for purposes of this calculation is not
necessarily a conclusive determination for other purposes.
As of March 1, 2006, 51,387,882 shares of
registrant’s common stock, $0.0001 par value, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s definitive Proxy Statement to be
filed with the Securities and Exchange Commission within
120 days after close of the fiscal year are incorporated by
reference into Part III of this report.
GEN-PROBE INCORPORATED
TABLE OF CONTENTS
FORM 10-K
For the Year Ended December 31, 2005
INDEX
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PART I
TRADEMARKS AND TRADE NAMES
ACCUPROBE®,
APTIMA®,
APTIMA COMBO
2®,
DTS®,
GASDIRECT®,
GEN-PROBE®,
LEADER®,
PACE®,
TIGRIS®
and our other logos and trademarks are the property of Gen-Probe
Incorporated.
PROCLEIX®
and
ULTRIO®
are trademarks of Chiron Corporation.
VERSANT®
is a trademark of Bayer Corporation. All other brand names or
trademarks appearing in this Annual Report on
Form 10-K are the
property of their respective holders. Use or display by us of
other parties’ trademarks, trade dress or products in this
Annual Report is not intended to, and does not imply a
relationship with, or endorsement or sponsorship of, us by the
trademark or trade dress owners.
FORWARD-LOOKING STATEMENTS
This Annual Report and the information incorporated herein by
reference contain forward-looking statements that involve a
number of risks and uncertainties, as well as assumptions that,
if they never materialize or if they prove incorrect, could
cause our results to differ materially from those expressed or
implied by such forward-looking statements. Although our
forward-looking statements reflect the good faith judgment of
our management, these statements can only be based on facts and
factors currently known by us. Consequently, forward-looking
statements are inherently subject to risks and uncertainties,
and actual results and outcomes may differ materially from
results and outcomes discussed in the forward-looking statements.
Forward-looking statements can be identified by the use of
forward-looking words such as “believes,”
“expects,” “hopes,” “may,”
“will,” “plans,” “intends,”
“estimates,” “could,” “should,”
“would,” “continue,” “seeks,”
“pro forma” or “anticipates,” or other
similar words (including their use in the negative), or by
discussions of future matters such as the development of new
products, technology enhancements, possible changes in
legislation and other statements that are not historical. These
statements include, but are not limited to, statements under the
captions “Business,” “Risk Factors,” and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” as well as other
sections in this Annual Report. You should be aware that the
occurrence of any of the events discussed under the heading
“Item 1A — Risk Factors” and elsewhere
in this Annual Report could substantially harm our business,
results of operations and financial condition. If any of these
events occurs, the trading price of our common stock could
decline and you could lose all or a part of the value of your
shares of our common stock.
The cautionary statements made in this Annual Report are
intended to be applicable to all related forward-looking
statements wherever they may appear in this Annual Report. We
urge you not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Annual
Report.
ABOUT THIS ANNUAL REPORT
This Annual Report includes market share and industry data and
forecasts that we obtained from industry publications and
surveys. Industry publications, surveys and forecasts generally
state that the information contained therein has been obtained
from sources believed to be reliable, but there can be no
assurance as to the accuracy or completeness of included
information. We have not independently verified any of the data
from third-party sources nor have we ascertained the underlying
economic assumptions relied upon therein. While we are not aware
of any misstatements regarding the industry and market data
presented herein, the data involve risks and uncertainties and
are subject to change based on various factors.
| Item 1. | Business |
Overview
We are a global leader in the development, manufacture and
marketing of rapid, accurate and cost-effective nucleic acid
probe-based products used for the clinical diagnosis of human
diseases and for screening donated human blood. We also develop
and manufacture nucleic acid probe-based products for the
detection of harmful organisms in the environment and in
industrial processes. We market and sell our clinical
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diagnostic products in the United States directly and outside
the United States primarily through distributors, and we market
and sell our other products through collaborative partners.
Founded in 1983, we pioneered the scientific and commercial
development of nucleic acid testing, or NAT. By utilizing
nucleic acid probes that specifically bind to nucleic acid
sequences known to be unique to target organisms, NAT enables
detection of microorganisms that are difficult or time-consuming
to detect with traditional laboratory methods. We have received
United States Food and Drug Administration, or FDA, approvals or
clearances for a broad portfolio of products that use our
patented technologies to detect a variety of infectious
microorganisms, including those causing sexually transmitted
diseases, tuberculosis, strep throat, pneumonia and fungal
infections. We estimate that our FDA-approved human
immunodeficiency virus (type 1), or HIV-1, assay,
hepatitis C virus, or HCV, assay, and Procleix West Nile
virus, or WNV, assay are currently utilized to screen over 80%
of the United States donated blood supply for HIV-1, HCV and
WNV. In addition, we believe our TIGRIS instrument is the only
integrated, fully-automated, high-throughput instrument approved
for NAT testing in clinical diagnostic applications by the FDA.
The TIGRIS instrument is also currently used for investigational
use in blood screening applications in the United States and has
been approved for use in Europe with our Procleix Ultrio assay.
We have more than 20 years of nucleic acid detection
research and product development experience, and our products
are used daily in clinical laboratories and blood collection
centers throughout the world. We were awarded a 2004 National
Medal of Technology, the nation’s highest honor for
technological innovation, by President George W. Bush in
recognition of our pioneering work in developing NAT tests to
safeguard the nation’s blood supply.
We generate revenues primarily from sales of clinical diagnostic
and blood screening assays. Our clinical diagnostic products are
marketed to clinical laboratories, public health institutions
and hospitals in the United States and Canada through our
direct sales and service force of approximately 57
representatives. Our blood screening products are marketed and
distributed worldwide by Chiron Corporation, or Chiron. In
addition, we have agreements with Bayer Corporation,
bioMérieux, Inc. and Fujirebio, through its subsidiary
Rebio Gen, Inc., to market some of our products in various
global markets. We are currently involved in arbitration
proceedings with Bayer regarding its distribution rights under
our collaboration agreement. In addition to product sales, we
also generate revenues through research collaborations with
government organizations and healthcare companies and through
licensing of our patented NAT technologies.
We are developing NAT assays and instruments for the detection
of harmful pathogens in the environment, water, industrial
processes and pharmaceutical and beverage manufacturing
processes. We have entered into collaboration agreements with GE
Infrastructure Water and Process Technologies, or GEI, a unit of
General Electric Company, and Millipore Corporation, or
Millipore, under which we will be primarily responsible for
developing and manufacturing assays for exclusive use or sale by
our collaborative partners in specified fields within the
industrial testing market.
We have achieved a leading position in the industry because of
our technologically advanced and reliable NAT assays and
instruments, complemented in the clinical diagnostics market by
the capabilities of our sales force and technical support group.
Our investment in research and development has enabled us to
develop a portfolio of proprietary and patented technologies
that we combine to create NAT products to meet our
customers’ changing needs for rapid, accurate and
cost-effective assays. We also have designed and developed,
often with outside vendors, a range of instruments to perform
our assays.
We have developed and commercialized what we believe to be the
world’s first fully automated, integrated, high-throughput,
NAT instrument system, the TIGRIS instrument. The TIGRIS
instrument can significantly reduce labor costs and
contamination risks in high-volume diagnostic testing
environments and it also enables large blood collection centers
to individually test donors’ blood. In December 2003, we
received approval from the FDA for sexually transmitted disease,
or STD, testing on the TIGRIS instrument using our APTIMA Combo
2 assay that detects chlamydia and gonorrhea. We have developed
and manufacture the only FDA-approved blood screening assay for
the simultaneous detection of HIV-1 and HCV, the Procleix HIV-1/
HCV assay, which is marketed by Chiron. We have also developed
the Procleix Ultrio assay, in collaboration with Chiron, which
adds an assay for hepatitis B virus, or HBV, to the previously
FDA-approved Procleix HIV-1/ HCV assay. In January 2004, the
Procleix Ultrio assay, running on our semi-automated
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instrument, received its Conformite Europeene, or CE, mark,
which permitted Chiron to launch the product in the European
Economic Area. The TIGRIS instrument, and our Procleix Ultrio
assay for use on the TIGRIS instrument, received CE marks in
December 2004, which permitted Chiron to begin commercialization
of the Procleix TIGRIS instrument in the European Economic Area.
In October 2005, the FDA notified us that it considers our
TIGRIS instrument for blood screening “not substantially
equivalent” to our already cleared enhanced semi-automated
instrument system, or eSAS, for screening donated human blood
with the Procleix Ultrio assay. The FDA made this determination
in response to our 510(k) application for the TIGRIS instrument
for blood screening. Also in October 2005, we received a
“complete review letter” from the FDA setting forth
questions regarding our Biologics License Application, or BLA,
for the Procleix Ultrio assay itself. We anticipate submitting a
BLA amendment for the Procleix Ultrio assay for use on eSAS,
responding to the FDA’s questions, by the end of the first
quarter of 2006. We anticipate submitting a new 510(k)
application for the TIGRIS instrument for use with the Procleix
Ultrio assay following clearance of the TIGRIS instrument for
use with the WNV assay. We anticipate submitting a
(post-approval) BLA supplement for the Procleix Ultrio assay,
for use on the TIGRIS instrument, following approval of the BLA
for the Procleix Ultrio assay on eSAS. There can be no assurance
that the Procleix Ultrio assay will receive regulatory approval
by the FDA or that the TIGRIS instrument will receive FDA
clearance for use with the WNV or Procleix Ultrio assays.
On December 1, 2005, the FDA granted marketing approval for
our WNV assay on eSAS to screen donated human blood. The 510(k)
clearance of eSAS for use with the WNV assay was granted prior
to the assay’s approval. We intend to submit for 510(k)
clearance of the TIGRIS instrument for use with the WNV assay in
the first part of 2006. We plan to submit a (post-approval)
supplement to our WNV assay BLA, adding the TIGRIS instrument,
at approximately the same time.
We were incorporated under the laws of the state of Delaware in
1987. In September 2002, we were spun off from Chugai
Pharmaceutical, Ltd., our former indirect parent, as a separate,
stand-alone company. Our common stock began trading on The
Nasdaq National Market on September 16, 2002.
We make available free of charge on or through our Internet
website our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q, current
reports on
Form 8-K and all
amendments to those reports as soon as reasonably practicable
after such material is electronically filed with or furnished to
the Securities and Exchange Commission. Our Internet address is
http://www.gen-probe.com. The information contained in, or that
can be accessed through, our website is not part of this Annual
Report.
The public may read and copy any materials that we file with the
SEC at the SEC’s Public Reference Room located at
450 Fifth Street NW, Washington, DC 20549. The public may
obtain information on the operation of the Public Reference Room
by calling the SEC at
1-800-SEC-0330. The SEC
also maintains electronic versions of our reports on its website
at www.sec.gov.
Technology
Nucleic acid testing technology is based on detection of unique
portions of nucleic acids, which store and transfer genetic
information in all living organisms. The two main types of
nucleic acids are deoxyribonucleic acid, or DNA, and ribonucleic
acid, or RNA. DNA functions as a stable repository of genetic
information, while RNA typically serves to transfer the
information stored within DNA to the cell’s machinery for
making proteins.
DNA and RNA are both composed of chains of chemical subunits
called nucleotides. There are four types of nucleotides in DNA,
which differ in one chemical part called a base. The four
different bases are: adenine, thymine, guanine and cytosine
(abbreviated A, T, G and C). These four nucleotides form the
building blocks of all DNA. The sequence of the individual A, T,
G and C nucleotides in a DNA molecule encodes the genetic
information that instructs the cell how to make particular
proteins. Because DNA sequences determine which proteins a cell
will make, the differences in a cell’s DNA sequences make
the cells of one organism differ from the cells of another.
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Most DNA in cells exists in the form of a double-stranded
structure that resembles a twisted ladder. In double-stranded
DNA, the nucleotides on opposite sides of the ladder are always
paired in a precise way. An “A” nucleotide binds only
to a “T” nucleotide on the opposite strand, and vice
versa. Likewise, a “G” nucleotide binds only to a
“C” nucleotide, and vice versa. Each combination of an
“A” nucleotide with a “T” nucleotide (or a
“C” with a “G”) is referred to as a
“base pair.” The way in which each type of nucleotide
binds only to one other type of nucleotide is called
“complementary base pairing.” As a result of
complementary base pairing, the sequence of nucleotides on one
strand of a DNA molecule necessarily determines the sequence of
nucleotides on the opposite strand.
The “attraction” of a nucleotide sequence to its
complementary sequence allows a scientist to use pieces of
nucleic acid as probes to detect the presence of a target
nucleic acid in a test sample. If two complementary pieces of
DNA (or RNA) are present in a solution under the right
conditions, the complementary bases will come together and bind
to form a double strand. This method is commonly known as
“nucleic acid hybridization.” Nucleic acid
hybridization techniques can be applied in a diagnostic test to
detect an infectious organism (the target organism) by the use
of a suitably labeled short nucleotide sequence or probe that is
designed to bind specifically to a complementary nucleic acid
sequence known to be unique to the target organism. The sample
suspected of containing the infectious organism is treated to
break open the organism, release its nucleic acids into the
solution, and render them single-stranded, if necessary. The
specific probe is then added, and conditions conducive to
hybridization are established.
If the target organism is present in the sample, the probe
should bind to the target organism’s nucleic acids because
the sequence of the probe has been designed to be complementary
to them. By attaching a detectable label to a probe, it is
possible to determine how much, if any, of that probe has bound
to sequences from the target organism.
In order to facilitate detection of the target, it is desirable
in many instances to increase the amount of target nucleic acid
present in a sample by a process known as amplification. The
goal of target amplification technologies such as our patented
Transcription-Mediated Amplification, or TMA, method is to
produce millions of copies of the target nucleic acids, which
can then be detected using DNA or RNA probes.
Current Market Opportunity
| Overview |
The NAT market developed in response to a need for more rapid,
sensitive and specific diagnostic tests for the detection of
infectious microorganisms than were previously available using
traditional laboratory procedures, such as culture and
immunoassays. Culture methods require the growth of a
microorganism in a controlled medium and can take several days
or longer to yield a definitive diagnostic result. By contrast,
nucleic acid probes, which specifically bind to nucleic acid
sequences that are known to be unique to the target organisms,
can generally deliver a diagnostic result in just hours. For
example, culture tests for Mycobacterium tuberculosis can
take six to eight weeks for a traditional culture-based
diagnosis, compared to only a few hours for NAT. The greater
sensitivity and increased specificity of NAT allows for the
detection of the presence of a lower concentration of the target
organism and helps clinicians distinguish between harmful and
benign microorganisms, even when the organisms are closely
related, reducing the potential for “false negative”
results and thus the number of undiagnosed individuals or
individuals who are incorrectly diagnosed as having the disease.
For example, the greater sensitivity of amplified NAT allows for
the rapid, direct detection of a target organism like
Chlamydia trachomatis in urine, even when it is present
in low concentrations. In addition, without amplified NAT, more
invasive methods of collection like cervical or urethral swabs
must be used.
According to Boston Biomedical Consultants, Inc., the worldwide
in vitro diagnostic, or IVD, NAT market was approximately
$2.1 billion in 2005. While NAT represents only a small
portion of the estimated $30 billion worldwide IVD market,
it is one of the fastest growing segments. Boston Biomedical
Consultants, Inc. reported that the worldwide NAT market grew
approximately 10% from 2004 to 2005. We focus our business on
market opportunities in three segments of the NAT market,
clinical diagnostics, blood screening and industrial testing.
The clinical diagnostic market has historically accounted for
the majority of our NAT
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sales. According to Sannes and Associates, Inc., our products
represented approximately 51% of the total chlamydia and
gonorrhea tests sold in the United States in 2005. In blood
screening, we estimate that our Procleix HIV-1/ HCV assay and
WNV assay are currently utilized to screen over 80% of the
United States donated blood supply for HIV-1, HCV and WNV. In
order to address the emerging NAT market for industrial testing,
in July 2005, we entered into a collaboration agreement with GEI
to develop, manufacture and commercialize NAT products designed
to detect the unique genetic sequences of microorganisms for
GEI’s exclusive use or sale in selected water testing
applications. In August 2005, we entered into a collaboration
agreement with Millipore to develop, manufacture and
commercialize NAT products for rapid microbiological and viral
monitoring for Millipore’s exclusive use or sale in process
monitoring in the biotechnology and pharmaceutical manufacturing
industries. The diagram below illustrates existing and emerging
worldwide NAT markets with some examples of product targets of
Gen-Probe and others within each category.
| The Product Categories in Which We Compete |
Clinical Diagnostics for the Detection of Non-Viral
Microorganisms. NAT assays currently are used to detect the
microorganisms causing various STDs, including chlamydia and
gonorrhea, as well as those causing various other infectious
diseases, such as Mycobacterium tuberculosis, Group A
Streptococcus and Group B Streptococcus.
Chlamydia, the common name for the condition of infection with
the bacterium Chlamydia trachomatis, is the most
prevalent bacterial sexually transmitted infection in the United
States, with an estimated
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2.8 million new cases in the United States each year
according to the Centers for Disease Control, or CDC. The
clinical consequences of undiagnosed and untreated chlamydia
infections include pelvic inflammatory disease, ectopic
pregnancy and infertility. Gonorrhea, the disease caused by the
bacterium Neisseria gonorrhoeae, is the second most
frequently reported bacterial STD in the United States,
according to the CDC. The CDC estimates that each year
approximately 700,000 people in the United States develop
gonorrhea. Untreated gonorrhea is also a major cause of pelvic
inflammatory disease, which may lead to infertility or abnormal
pregnancies. In addition, recent data suggest that gonorrhea
facilitates HIV transmission. Chlamydia and gonorrhea infections
frequently co-exist, complicating the clinical differential
diagnosis. Because chlamydia and gonorrhea infections are often
asymptomatic, screening programs are important in high-risk
populations such as sexually active men and women between the
ages of 15 and 25.
Tuberculosis, or TB, the disease caused by the microorganism
Mycobacterium tuberculosis, remains one of the deadliest
diseases in the world. Group B Streptococcus, or GBS, represents
a major infectious cause of illness and death in newborns in the
United States and can cause epilepsy, cerebral palsy, visual
impairment, permanent brain damage and retardation. Group A
Streptococcus, or GAS, is the cause of “strep” throat,
which if left untreated may cause serious complications, such as
rheumatic fever and rheumatic heart disease.
Clinical Diagnostics for the Detection of Viral
Microorganisms. NAT assays can be used to detect viral DNA
or RNA in a patient sample. These tests can be qualitative,
meaning that the tests simply provide a “yes-no”
answer for the presence or absence of the virus, or
quantitative, meaning that the quantity of virus is determined
in the patient sample.
HIV is the virus responsible for acquired immune deficiency
syndrome, or AIDS. Individuals with AIDS show progressive
deterioration of their immune systems and become increasingly
susceptible to various diseases, including many that rarely pose
a threat to healthy individuals.
HCV is a blood-borne pathogen posing one of the greatest health
threats in developing countries. According to WHO, about 80% of
newly infected patients progress to develop chronic infection,
which can lead to both cirrhosis and liver cancer. WHO reports
that approximately 170 million people are infected
worldwide with HCV. According to the CDC, an estimated
3.9 million people in the United States have been infected
with HCV, of whom 2.7 million are chronically infected.
HBV remains a major public health problem worldwide, though new
HBV infections per year in the United States have declined
significantly since the 1980s. Chronic HBV infection can lead to
the development of severe, potentially fatal complications, such
as cirrhosis of the liver.
Blood Screening. The field of blood screening has been
one of the fastest growing areas for NAT assays. According to
the World Health Organization, or WHO, each year more than
75 million units of blood are donated worldwide. Before
being used for transfusion, blood must be screened to ensure
that it does not contain infectious agents. The most serious
threats to recipients of donated blood include HIV, HCV and HBV.
There is also concern over the presence of other viruses in the
donated blood supply, such as WNV. In the United States, most
blood collection centers perform NAT screening of donated blood
by taking samples from individual units of blood and then
combining these samples into pools of 16 or 24 samples. These
pooled samples are then tested to determine whether a virus is
present. If the presence of a virus is detected, additional
testing is then conducted to determine which sample in the pool
contains the virus. Some blood collection centers, such as the
United States military, test blood units individually rather
than in pools.
Prior to the introduction of NAT for blood screening, blood
collection centers primarily used immunoassays to determine the
presence of blood-borne pathogens through the detection of
virus-specific antibodies and viral antigens. These tests either
directly detect the viral antigens or detect antibodies formed
by the body in response to the virus. However, this response may
take some time. Consequently, if the donor has not developed
detectable antibodies or detectable amounts of viral antigens as
of the time of the donation, recipients of that blood may be
unwittingly exposed to serious disease. In the case of HIV-1,
antibodies are detectable in the blood approximately
22 days after infection. With HCV, the window between the
time of infection and the detection of the antibodies is much
longer, approximately 70 days or more. NAT technology can
narrow both windows significantly through amplification and
detection of the nucleic acid material of the
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viruses themselves rather than requiring the development of
detectable levels of antibodies or viral antigens. According to
the CDC, NAT will reduce the window period for HIV-1 detection
from 22 days for tests relying on HIV-1 antibodies to
12 days. We believe that NAT reduces the window period for
HCV detection by approximately 50%, compared to tests relying on
HCV antibodies. We believe that with individual donor testing,
or IDT, NAT assays may reduce the window period for HBV
detection by up to 42%, compared to HBV antibody tests for
detection of HBV surface antigen. We also believe that the only
practical means of accomplishing IDT for HBV detection will be
through the use of a fully automated instrument such as our
TIGRIS instrument. IDT on our TIGRIS instrument was demonstrated
as part of our Procleix WNV TIGRIS Investigational New Drug
application, or IND, for IDT.
| Industry Growth Trends |
Adoption of amplified screening technology. We believe
that the market for clinical diagnostic products for the
detection of non-viral microorganisms, particularly STDs, will
expand due to the adoption of amplified screening technology.
Amplification is particularly advantageous when screening for
the presence of a microorganism when the level of that
microorganism in clinical samples might be insufficient to
permit detection with other methods. While potential carriers of
STDs may forego diagnosis if faced with invasive methods of
testing, we believe amplified NAT technology, which can use
samples collected non-invasively, such as urine, will expand
screening of high-risk populations and asymptomatic individuals.
Advances in automated testing. We believe that the
introduction of automated instrumentation, such as our TIGRIS
instrument, will facilitate growth in both the clinical
diagnostics and blood screening segments of the NAT market. It
is becoming increasingly difficult for clinical laboratories to
recruit and retain skilled laboratory technologists. Within the
STD segment, we anticipate that demand for automated testing
will increase as the technology is applied to diagnose new
target microorganisms, including human papillomavirus, or HPV,
which has been linked to cervical cancer, and the herpes simplex
virus. The rate of market growth for testing additional
STD-related microorganisms will depend heavily upon automation,
as well as continuing advances in testing methodologies that
address the issues of specificity, sensitivity, contamination,
ease of use, time to results and overall cost effectiveness.
Increased focus on safety of blood supply. We believe
blood collection centers will continue to focus on improving the
safety of donated blood by adopting the most advanced blood
screening technologies available. In addition, we believe that
some blood collection centers will seek to adopt individual
donor testing for some or all organisms, rather than the testing
of pooled samples, as automated instrumentation technologies
make such testing feasible. During the peak period of the WNV
season in each of 2004 and 2005, various blood collection
centers used our technology and assays, under an investigational
exemption, for individual donor testing. Approximately 1,500
infected units have been intercepted using our WNV assay since
June 2003.
Demand for improved diagnostic tests for cancer. New
markers that correlate to the presence of cancer cells are being
discovered at an ever-increasing rate, and we believe that once
these markers have been clinically validated, there will be a
large market for NAT-based cancer diagnostic products. Our
license and collaboration agreement with DiagnoCure Inc. and our
license agreements with Corixa Corporation and the Henry M.
Jackson Foundation for the Advancement of Military Medicine,
Inc. could represent an innovative application of our NAT
technology to detect genetic markers for prostate cancer in
urine. In addition, we have recently entered into a research
agreement with SmithKline Beecham Corporation, doing business as
GlaxoSmithKline, and SmithKline Beecham (Cork) Ltd., together
referred to as GSK, and a research agreement with the Henry M.
Jackson Foundation and the Uniformed Services University of
Health Sciences, that together operate the Center for Prostate
Disease Research, which we believe will provide us with
opportunities to further assess our cancer diagnostic portfolio.
We have also licensed innovative cell capture technology from
AdnaGen AG that may allow for improved isolation of prostate
cancer cells.
Emerging opportunities in industrial testing market for rapid
molecular methods. We believe that significant new
opportunities are emerging for NAT-based products in various
industrial market segments, including quality control testing in
biopharmaceutical processes and environmental and industrial
water testing for harmful bacteria. We believe the move to rapid
molecular methods is being driven by economic factors as
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well as regulatory factors such as the FDA’s Process
Analytical Technology, or PAT, initiative to encourage
pharmaceutical companies to adopt rapid methods to test their
manufacturing processes for the presence of objectionable
organisms. We believe our collaborations with GEI and Millipore
will facilitate our development of new products for, and access
to, these new markets.
Development of other emerging markets for NAT technology.
We believe markets will continue to develop for new applications
for NAT technology in other clinical and non-clinical fields.
Among clinical fields, we believe NAT technology will be
utilized in the areas of new analytes, such as genetic
predisposition testing and pharmacogenomics, which involves the
study of the relationship between nucleic acid variations and an
individual’s response to a particular drug.
We believe that NAT diagnostic assays will be used in the field
of pharmacogenomics to screen patients prior to administering
new drugs. Many genetic variations are caused by a single
mutation in nucleic acid sequence, a so-called “single
nucleotide polymorphism,” or SNP. Individuals with a
specific SNP in a drug metabolism gene may not respond to a drug
or may have an adverse reaction to that drug because the body
may not metabolize the drug in a normal fashion. We believe the
emergence of pharmacogenomics and individually targeted
therapeutics will create opportunities for diagnostic companies
to develop tests to detect genetic variations that affect
responses to drug therapies.
Genetic testing to identify individuals at risk of certain
diseases and pathological syndromes is emerging as an additional
market for NAT technology. NAT-based testing for SNPs and other
genetic anomolies can be used to determine an individual’s
predisposition to such conditions as thrombosis or
bloodclotting. Our license of bioMérieux’s
intellectual property rights for the factor V and prothrombin
mutation tests could allow us to access this market.
In addition to testing in biopharmaceutical processes and
environmental and industrial water testing, emerging
non-clinical markets for NAT include food, beverage, personal
care products manufacturing and bioterrorism detection testing.
Today, these markets predominately use traditional methods for
microbiological testing, such as culture. However, we believe
NAT testing has the potential to provide more rapid and
efficient tests in these markets.
Improvements in Detection Technologies. The majority of
current amplified nucleic acid tests provide an “end
point” result, requiring that the amplification and
detection processes be completed before a result is obtained.
New technology permits kinetic or “real-time”
detection of target analytes as amplification proceeds,
permitting conclusions to be drawn before the amplification
process is complete, and thereby reducing the time to result.
Real-time detection methods are also capable of providing both a
qualitative and quantitative result from a single test. Initial
real-time products have been introduced by several companies.
For example, on January 23, 2006, Abbott Laboratories
announced it had received CE mark certification for a new
real-time test for the simultaneous detection of Chlamydia
trachomatis and Neisseria gonorrhoeae, allowing the
test to be marketed in the European Economic Area. In April
2005, Roche announced CE mark certification for its real-time
COBAS AmpliPrep/ COBAS TaqMan tests for HIV-1, HCV, and HBV. We
intend to develop assays for our collaborations with GEI and
Millipore using real-time technology.
Our Competitive Strengths
Our competitive strengths form the foundation for our business
and position us to compete effectively within the NAT market.
| Proprietary Core Technologies |
We believe that we have developed one of the broadest portfolios
of NAT technologies in the industry. Our products incorporate
these technologies, which, in combination, have significantly
advanced our NAT assays, making them more specific, more
sensitive, easier to use and faster to result than products
based on competing NAT technologies. For example, our
proprietary Transcription-Mediated Amplification, or TMA,
technology offers significant advantages over other available
amplification methods, including Polymerase Chain Reaction, or
PCR. We believe TMA technology allows our products to offer a
higher degree of
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sensitivity, less risk of contamination and greater ease of use
than our competitors’ amplified products. We believe our
target capture technology, which is used to extract either
molecules with specific target sequences or all genetic material
from a complex clinical specimen, can remove inhibitory
substances that interfere with amplification, can be easily
automated, and can be performed quickly. In the past, we have
leveraged our core technologies to develop products that have
achieved leading positions in new NAT markets, such as blood
screening and STD testing. We plan to continue to use our core
NAT technologies, and technologies that we may acquire, as a
platform for the development of additional products addressing
opportunities in existing and emerging segments of the NAT
market.
| Extensive Range of FDA-Approved Products and Intellectual Property Portfolio |
We believe that we are unique in offering our customers a broad
range of both non-amplified and amplified NAT assays, as well as
multiple instruments on which to perform these assays. Our
expertise in NAT products has enabled us to develop FDA-approved
products for the detection of microorganisms causing infectious
diseases. In February 2002, we received FDA approval for our
Procleix HIV-1/ HCV assay, which we estimate is currently
utilized to screen over 80% of the United States donated blood
supply for HIV-1 and HCV. In December 2005, the FDA granted us
marketing approval to use our WNV assay to screen donated human
blood on eSAS. Our NAT assays currently are performed on our
proprietary luminometers and our semi-automated Direct Tube
Sampling, or DTS, and TIGRIS (in the case of our APTIMA Combo 2
and Procleix Ultrio assays) instruments. As of December 31,
2005, we had more than 390 United States and foreign patents
covering our products and technologies, and we proactively
pursue an aggressive patent strategy designed to protect both
existing products and new innovations.
| Innovative Product Research and Development |
We pioneered the development of the NAT market with our
introduction of the first FDA-approved probe-based assay in
1985. As of December 31, 2005, our world-class research and
development group consisted of 230 full-time employees, 108
of whom hold advanced degrees. From our PACE family of products
to our amplified APTIMA Combo 2 assay, which can detect both
chlamydia infections and gonorrhea in urine samples from
symptomatic or asymptomatic patients, and our Procleix Ultrio
assay that detects HIV-1, HCV and HBV in donated blood, our
scientists have developed proprietary assays that have brought
significant innovation to the market for NAT clinical
diagnostics and blood screening. To complement these products,
we have developed and continue to develop instrumentation
technologies that enable our customers to increase throughput
while improving accuracy in a cost-effective manner. We have
developed, and launched in 2004, what we believe to be the
world’s first fully automated, integrated, high-throughput,
NAT instrument system, known as the TIGRIS instrument. We were
awarded a 2004 National Medal of Technology, the nation’s
highest honor for technological innovation, in recognition of
our pioneering work in developing NAT tests to safeguard the
nation’s blood supply. Our current initiatives to expand
our position in clinical diagnostics and blood screening, while
applying our core NAT technologies to cancer detection and
industrial testing, are consistent with our philosophy of
designing innovative products to meet the existing needs of our
customers as well as the emerging needs of new markets.
| Brand Recognition |
We believe that we benefit from significant brand name
recognition and customer loyalty among laboratories, blood
collection agencies and physicians in the market for NAT assays.
We believe our history of technological innovation, quality
manufacturing, comprehensive sales capabilities and commitment
to customer support has resulted in customer satisfaction and
retention. We estimate that greater than 90% of our STD product
sales during 2005 were to repeat customers. We believe that our
brand name also facilitates market acceptance of our new
products, providing us with opportunities for growth. Based on
information we receive from Chiron, we believe that since 1998
the American Red Cross has used us as its sole source for NAT
assays for blood screening, which we believe exemplifies our
standing in the industry.
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| Sales and Technical Support Capabilities |
As of December 31, 2005, our direct sales force consisted
of approximately 41 representatives and a
16-member technical
field support group. We believe that these individuals comprise
one of the most knowledgeable and effective sales and support
organizations in the molecular diagnostics industry. Our sales
representatives have an average of approximately 20 years
of overall sales experience, with an average of approximately
eight years focused on sales of NAT products. We view our
long-standing relationships with laboratory customers and the
value-added services that our sales force and technical field
specialist group offer, including technical product assistance,
customer support and new product training, as central to our
success in the United States clinical diagnostics market. We
complement our sales force with leading international
distributors and the direct sales organizations of our
collaborative partners.
| Regulatory, Clinical and Quality Assurance Experience |
Our products, design control and manufacturing processes are
regulated by numerous third parties, including the FDA, foreign
governments, independent standards auditors and customers. Our
team of over 100 regulatory, clinical and quality systems
professionals has successfully led us through multiple quality
and compliance audits. We began production in our blood
screening product manufacturing facility in 1999. This facility
meets the strict standards set by the FDA’s Center for
Biologics Evaluation and Research, or CBER, for the production
of blood screening products. In addition, we have obtained EN
13485 certification from TUV, a global leader in independent
testing and assessment services. We believe our expertise in
regulatory, clinical and quality assurance and our manufacturing
facilities enable us to efficiently and effectively design,
manufacture and secure approval for new products and
technologies that meet the rigorous standards set by governing
bodies and our customers.
Our Growth Strategy
We have successfully created and maintained a leadership
position in a number of segments of the NAT testing market. From
this strong position, we plan to grow our business through the
following strategies:
| Establish Leadership Positions in New Markets by Leveraging Our Core Technologies |
We have had a successful track record in identifying new product
and market opportunities and becoming the market leader in a
number of NAT testing segments by providing innovative product
solutions based on our proprietary technology base. In the past,
we have utilized our patented technology portfolio, innovation
and market development expertise to establish leadership
positions in areas such as chlamydia and gonorrhea testing. Our
ability to strategically identify and assume leadership roles in
new markets was evidenced by our entrance into the blood
screening market. We successfully developed the first
FDA-approved NAT assay for HIV-1/ HCV detection, our Procleix
HIV-1/ HCV assay, which we estimate is currently used to screen
over 80% of the United States donated blood supply. Our WNV
assay, which received FDA marketing approval in December 2005
for screening donated human blood on eSAS, also is currently
being used to screen more than an estimated 80% of the United
States blood supply. We received CE mark clearance for the use
of the Procleix Ultrio assay in conjunction with our TIGRIS
instrument for Europe, which represents the first fully
automated blood screening NAT system cleared for commercial
distribution in Europe.
We currently are exploring opportunities to develop new products
for emerging NAT markets. We recently developed analyte specific
reagents, or ASRs, for the detection of PCA3, a genetic marker
for prostate cancer. Our license and collaboration agreement
with DiagnoCure Inc. and our license agreements with Corixa
Corporation and the Henry M. Jackson Foundation for the
Advancement of Military Medicine, Inc. could represent an
innovative application of our NAT technology to detect genetic
markers for prostate cancer in urine. In July 2005, we entered
into a collaboration agreement with GEI to develop, manufacture
and commercialize NAT products designed to detect the unique
genetic sequences of microorganisms for GEI’s exclusive use
or sale in selected water testing applications. In August 2005,
we entered into a collaboration agreement with Millipore to
develop, manufacture and commercialize NAT products for rapid
microbiological and viral monitoring for Millipore’s
exclusive use or sale in process monitoring in the
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biotechnology and pharmaceutical manufacturing industries. We
also are evaluating product opportunities in genetics,
pharmacogenomics, food and environmental testing.
| Deliver Proprietary Automated and Fully Integrated Systems for NAT Assays |
We intend to continue to develop instruments that complement our
existing and anticipated product lines for use in clinical
diagnostics, blood screening and industrial testing. For
example, we have developed and received FDA approval for STD
testing on the TIGRIS instrument. The TIGRIS instrument should
significantly reduce the time, labor costs, risk of
contamination and complexity associated with performing NAT
assays and blood screening. We believe that the increased
utility of this platform will lead to significant advances in
both the clinical diagnostics and blood screening markets. The
automation and increased throughput of the TIGRIS instrument
will enable blood collection centers to process the large
testing volumes necessary to screen each individual unit of
donated blood for the presence of life-threatening viruses. In
addition to the TIGRIS instrument, we currently are developing
other next-generation systems to meet customers’ needs for
increased productivity, automation and “point of care”
or “field testing” capabilities. Ultimately, we
believe this approach of providing our customers with the latest
generation of systems solutions will allow us to reinforce our
market position and brand recognition and penetrate new markets.
| Expand Our Menu of NAT Probe Assays through Innovative Research and Development |
We intend to continue to use a systems approach to product
development, which involves combining elements of our core
proprietary technologies to create products that best meet our
customers’ needs. For example, the Procleix Ultrio assay,
which we developed in collaboration with Chiron, adds an assay
for HBV to the previously approved Procleix HIV-1/ HCV assay and
is designed to detect the presence of all known HIV-1 groups and
subtypes and HCV and HBV genotypes in human plasma during the
very early stages of infection, when those agents are present
but cannot be detected by immunodiagnostic tests. By
understanding how our technologies complement one another and by
combining reagents in our new products, we expect to capitalize
on the substantial product development work that we invested in
existing products. We believe that this approach and our
experience in bringing FDA-approved products to market will
reduce development cycle times for new products, which, in turn,
will help us expand our menu of clinical diagnostic and blood
screening products available to be performed on the instruments
we place with our customers.
| Pursue Future Licensing and Acquisition Opportunities |
We historically have supplemented our internal research and
development efforts by obtaining licenses to new technologies.
To maintain our leadership position in NAT testing, we intend to
selectively obtain rights to complementary technologies through
licenses and acquisitions. For us to enter emerging NAT markets
such as cancer testing, genetics, pharmacogenomics and
industrial testing, we may need to obtain rights both to new
technologies and to disease markers that are discovered and
clinically validated by third parties. For example, in 2003, we
signed a license and collaboration agreement with DiagnoCure to
develop an innovative urine test to detect the PCA3 gene marker
for prostate cancer. In addition, in December 2004, we entered
into a license agreement with Corixa Corporation pursuant to
which we received rights to develop molecular diagnostic tests
for multiple potential genetic markers in the areas of prostate,
ovarian, kidney, lung, colon and other cancers. In December
2005, we entered into a license agreement with the Henry M.
Jackson Foundation for the Advancement of Military Medicine,
Inc. for access to additional markers that we believe could help
us to further increase the accuracy of our tests for prostate
cancer.
| Expand Collaborative Relationships to Accelerate New Product Development and Enhance Our Global Marketing Capabilities |
We will pursue collaborative relationships that enable us to
implement our strategies, particularly with respect to the
development of new products and entry into new markets. We seek
to partner with industry leaders who can offer access to
intellectual property or who can complement our
commercialization capabilities by distributing co-developed
products through their sales organizations. For example, our
collaboration with Chiron for the blood screening market has
allowed us to combine our NAT technology with
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Chiron’s patent portfolio relating to HIV and HCV and to
leverage Chiron’s distribution and sales resources.
Further, we believe our collaborations with GEI and Millipore,
pursuant to which each will manage worldwide commercialization
of any products resulting from the respective collaborations,
will enable us to access their large customer bases in the
markets for industrial water testing and biopharmaceutical
processes testing, respectively.
Our Proprietary NAT Technologies
We have developed technologies that make NAT assays practical
and effective for commercial use, thereby overcoming many of the
limitations of previous DNA probe assays that restricted their
use to research laboratories. Our products incorporate a
combination of patented technologies that have significantly
advanced NAT assays, making them more specific, more sensitive,
easier to use and faster to result than products based on
competing technologies. These technologies include the following:
| • | targeting of ribosomal RNA, or rRNA; | |
| • | target capture/nucleic acid extraction technology; | |
| • | Transcription-Mediated Amplification technology; | |
| • | chemiluminescent detection using Hybridization Protection Assay and Dual Kinetic Assay technologies; and | |
| • | fluorescent real-time detection technology. |
Together, these technologies have allowed us to commercialize
new diagnostic tools that provide results in hours instead of
days or weeks. This has led to quicker time to result and
diagnosis, thereby making a difference in patient treatment and
outcome.
Targeting Ribosomal RNA. We have developed and patented a
technique that detects and identifies organisms by targeting
their rRNA. The major benefits in targeting rRNA include the
following:
| • | Each bacterial cell contains up to 10,000 copies of rRNA, as compared with only a few copies of DNA. Most of our competitors’ NAT assays target DNA, which is present in only one or two copies in each target organism cell. Therefore, by using a probe that hybridizes to rRNA, the sensitivity of the test is increased thousands of times. This has allowed us to develop indirect and direct probe tests that are used with cultured samples or samples drawn directly from the patient. | |
| • | The high number of rRNA targets also offers significant advantages when target-amplified assays are used. When very small numbers of organisms are present in a sample, they may not be present in the portion of the sample used for the assay, despite being present in the sample. This would result in a negative test result. By breaking open the organisms prior to sampling, the multiple copies of rRNA targets are dispersed throughout the sample volume and the likelihood of detecting them is increased many fold. Thus, the likelihood of obtaining a false negative result is significantly less than is the case when single-copy DNA is targeted. | |
| • | rRNA molecules naturally exist as single strands that can directly hybridize with our chemiluminescent labeled DNA probes. This is in contrast to most DNA targets, which exist as double strands that must be separated before a probe can bind. These separated DNA strands tend to hybridize to each other rather than to the DNA probe, thus limiting the amount of DNA probe that can bind and the overall sensitivity of the test. | |
| • | rRNA molecules are present in all bacteria, fungi and parasites. This gives us the ability to design diagnostic products for emerging infectious diseases caused by these pathogens. |
Target Capture/ Nucleic Acid Extraction Technology.
Detection of target organisms that are present in small numbers
in a large-volume clinical sample requires that target organisms
be concentrated to a detectable level. One way to accomplish
this is to isolate the particular nucleic acid of interest by
binding it to a solid
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support, which allows the support, with the target bound to it,
to be removed from the original sample. We refer to such
techniques as “target capture.”
We have developed target capture techniques to immobilize
nucleic acids on magnetic beads by the use of a “capture
probe” that attaches to the bead and to the target nucleic
acid. We use a magnetic separation device to concentrate the
target by drawing the magnetic beads to the sides of the sample
tube, while the remainder of the sample is washed away and
removed. When used in conjunction with our patented
amplification methods, target capture techniques concentrate the
target organisms and also remove materials in the sample that
might otherwise interfere with amplification.
Target capture offers the following benefits:
| • | Concentration of target organisms from large volume samples, without the need for centrifugation steps, | |
| • | Elimination of potential inhibitors of amplification, | |
| • | Increased ability to test a variety of clinical samples, including urine and blood, | |
| • | Capture of multiple targets by using capture probes that hybridize to one or more specific nucleic acid sequences, and | |
| • | Enhanced specificity through selective capture of target and removal of contaminants that may produce a false positive signal. |
Transcription-Mediated Amplification. The goal of
amplification technologies is to produce millions of copies of
the target nucleic acid sequences that are present in samples in
small numbers, which can then be detected using DNA probes.
Amplification technologies can yield results in only a few hours
versus the several days or weeks required for traditional
culture methods.
Many amplification-based NAT assays for routine clinical
laboratory use a technology known as Polymerase Chain Reaction,
or PCR, to amplify DNA. With additional steps, PCR also can be
used to amplify RNA. Since most organisms contain only one or
two copies of DNA, there are fewer target molecules to initiate
amplification when DNA targets are used, and sometimes
amplification does not begin at all. In such cases, assays using
PCR can fail to produce results. PCR also uses repeated heating
and cooling steps requiring complex and expensive thermocyclers.
Because PCR produces large amounts of DNA, which, unlike RNA is
a stable molecule, there is an increased risk of
cross-contamination from one PCR assay to another, potentially
leading to a high number of false positive results.
Our patented TMA technology is designed to overcome problems
faced by other target amplification methods such as PCR. TMA is
a transcription-based amplification system that uses two
different enzymes to drive the process. The first enzyme is a
reverse transcriptase that creates a double-stranded DNA copy
from an RNA or DNA template. The second enzyme, an RNA
polymerase, makes thousands of copies of the complementary RNA
sequence, known as the “RNA amplicon,” from the
double-stranded DNA template. Each RNA amplicon serves as a new
target for the reverse transcriptase and the process repeats
automatically, resulting in an exponential amplification of the
original target that can produce over a billion copies of
amplicon in less than 30 minutes.
TMA offers the following benefits:
| • | The TMA process takes place in one tube at one temperature without the need of thermocyclers required by PCR. All reagents are added to the tube and nothing is removed. This makes the test simpler to use and suitable for automation, and it minimizes the possibility of carry-over contamination and false positive test results; | |
| • | The RNA nucleic acid that is synthesized in the TMA reaction, or amplicon, is much more unstable when outside the reaction tube than the DNA that is produced in the PCR method. This instablility of TMA amplicon in the general laboratory environment reduces the possibility of carry-over contamination; |
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| • | TMA is able to amplify RNA and DNA targets, whereas PCR requires additional reagents and steps to amplify RNA; and | |
| • | TMA can be used in end-point chemiluminescent as well as “real-time” qualitative and quantitative fluorescent assays. |
Chemiluminescent Technologies and Hybridization Protection
Assay. Our current DNA products use chemiluminescent
acridinium ester, or AE molecules, to generate light as a label
for detection. When
AE-labeled DNA probes
are mixed with chemical activators, a light signal is produced.
Many DNA probe assays and immunoassays use enzyme or
radioisotope labels. Assays that use enzyme-labeled DNA probes
are complex and can be inhibited by contaminants present in the
sample. Radioisotopes offer a strong signal but are difficult to
handle, difficult to dispose of and dangerous because they give
off harmful radiation.
We have simplified testing, further increased test sensitivity
and specificity, and increased convenience with our patented
Hybridization Protection Assay, or HPA, technology. With HPA, we
introduced the first NAT assay that did not require the
cumbersome wash steps needed with conventional probe tests and
immunoassays. In the HPA process, the AE molecule is protected
within the double-stranded helix that is formed when the probe
binds to its specific target. Prior to activating the AE
molecule, known as “lighting off,” a chemical is added
that destroys the AE molecule on any unhybridized probes,
leaving the label on the hybridized probes largely unaffected.
When the “light off” reagent is added to the specimen,
only the label attached to the hybridized probe produces a
signal indicating the target organism’s DNA or RNA is
present. All of these steps occur in a single container and
without any wash steps.
Our Dual Kinetic Assay, or DKA, technology uses two types of AE
molecules — one that “flashes” and another
one that “glows.” By using DKA, we have created NAT
assays that can detect two separate targets simultaneously.
Fluorescent Real-Time Detection Technology. In addition
to HPA chemiluminescent detection assays, we have developed a
series of real-time fluorescent assay systems. These assays
couple TMA, or versions of TMA amplification, with fluorescent
probe detection that give increased fluorescent outputs with
increasing amounts of amplified target nucleic acid. In these
assay formats, amplification and detection take place
simultaneously. Consequently, the total time to get a result can
be reduced significantly. We have several types of probes for
these assays, including probes that we have patented and probes
that we have licensed from third parties. We expect that our
first products to utilize this format will be in the industrial
testing market.
APTIMA Technology. We have combined target capture, TMA
and DKA together into an integrated family of technologies known
as APTIMA. APTIMA assays are highly refined amplification
assays, simplifying sample handling, minimizing contamination
and allowing for the simultaneous detection of two analytes in
one tube. APTIMA assays offer modern clinical laboratories the
significant advantage of carrying out all steps of the assay in
a single tube. APTIMA thereby increases assay performance,
reduces laboratory costs and improves laboratory efficiency.
APTIMA technology combined with automation such as the TIGRIS
instrument supports true walk-away automation, allowing hundreds
of specimens to be tested by an individual technician in a
single run.
Our Products
We have applied our core technologies to develop multiple
product lines, all of which utilize our expertise in NAT probes,
sample collection and processing. We categorize our products
into clinical diagnostic products and blood screening products.
| Clinical Diagnostic Products. |
Within our clinical diagnostic product group, we have developed
products for the detection of non-viral and viral microorganisms.
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Clinical Diagnostic Products for the Detection of Non-Viral
Microorganisms. We have developed FDA-approved amplified and
non-amplified NAT assays that detect non-viral microorganisms
primarily for use in clinical diagnostics. We have established a
market-leading position in non-amplified NAT assays,
particularly with respect to assays for the detection of
chlamydia and gonorrhea, and we have obtained FDA approval for
an amplified STD test to compete in that market segment. Our
principal products for the detection of non-viral microorganisms
include our non-amplified AccuProbe and non-amplified PACE
family of products and our amplified Mycobacterium Tuberculosis
Direct Test and amplified APTIMA Combo 2 product, as set forth
below.
Clinical Diagnostic Products for the Detection of Non-Viral
Microorganisms
| FDA | Commercial | ||||||||||||
| Product Line | Principal Technologies | Target Microorganism | Clearance/Approval | Distribution | |||||||||
|
AccuProbe Culture Identification |
Non-amplified detection of organisms from culture isolates by using rRNA as the target and Hybridization Protection Assay |
Blastomyces dermatitidis Campylobacter Coccidioides immitis Enterococcus Histoplasma capsulatum Haemophilus influenzae Group B Streptococcus Group A Streptococcus Mycobacterium avium Complex Mycobacterium avium Mycobacterium gordonae Mycobacterium intracellulare Mycobacterium kansasii Mycobacterium tuberculosis Neisseria gonorrhoeae Streptococcus pneumoniae Staphylococcus aureus Listeria monocytogenes |
September 1990 November 1989 October 1990 November 1989 February 1990 March 1990 November 1989 November 1990 May 1990 August 1990 April 1990 August 1990 November 1990 April 1990 November 1989 August 1990 August 1990 June 1990 |
Gen-Probe — North America bioMérieux Rebio Gen and other distributors — Rest of World |
|||||||||
| GASDirect | Non-amplified detection of rRNA from a swab sample by Hybridization Protection Assay | Group A Streptococcus | March 1994 |
Gen-Probe — North America bioMérieux, Rebio Gen and other distributors — Rest of World |
|||||||||
|
PACE Product Family |
Non-amplified detection of rRNA from patient sample by Hybridization Protection Assay | Chlamydia trachomatis and Neisseria gonorrhoeae, including combined detection |
PACE — December 1987 PACE 2 — April 1992 PACE 2C — October 1994 |
Gen-Probe — North America bioMérieux, Rebio Gen and other distributors — Rest of World |
|||||||||
|
Mycobacterium Tuberculosis Direct Test (or MTD) |
Transcription- Mediated Amplification of rRNA in patient sample and detection by Hybridization Protection Assay |
Mycobacterium tuberculosis | December 1995 |
Gen-Probe — North America bioMérieux, Rebio Gen and other distributors — Rest of World |
|||||||||
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| FDA | Commercial | ||||||||||||
| Product Line | Principal Technologies | Target Microorganism | Clearance/Approval | Distribution | |||||||||
|
APTIMA Combo 2 |
Target Capture, Transcription-Mediated Amplification of rRNA and detection by Dual Kinetic Assay |
Chlamydia trachomatis and Neisseria gonorrhoeae in swab specimens and urine samples from symptomatic and asymptomatic males and females |
May 2001 |
Gen-Probe — North
America Europe Rebio Gen — Japan |
|||||||||
|
APTIMA CT APTIMA GC |
Target Capture, Transcription-Mediated Amplification of rRNA and detection by Dual Kinetic Assay | Chlamydia trachomatis and Neisseria gonorrhoeae |
December 2004 March 2005 |
Gen-Probe — U.S. | |||||||||
|
APTIMA Trichomonas ASR |
Target Capture, Transcription- Mediated Amplification of rRNA and detection by Dual Kinetic Assay | Trichomonas vaginalis | Not required | Gen-Probe — U.S. | |||||||||
AccuProbe Products. Our AccuProbe Culture Identification
products are powerful tools for the identification of
mycobacterial, fungal and bacterial pathogens, with
sensitivities and specificities approaching 100% in most cases.
These products allow for the detection of target organisms from
primary cultures, eliminating the additional labor of purifying
secondary cultures. All AccuProbe Culture Identification assays
are based on our HPA technology. All of our AccuProbe Culture
Identification tests follow a standard format, use common
reagents and do not require highly trained technical personnel.
Results are obtained utilizing our luminometers, which are easy
to use and offer precise readings. In addition, the convenient
packaging provides extended stability and shelf life. As part of
our AccuProbe Culture Identification product line, we also have
developed a procedure to detect Group B Streptococcus, or GBS,
from broth culture. The assay demonstrates near 100% sensitivity
and specificity when testing broth samples after 24 hours
of incubation. Our products address the market need for a more
rapid, direct test procedure for GBS that can be used to
effectively screen women during pregnancy and to provide prompt
results when testing is performed just before delivery.
Group A Streptococcus Direct. The Group A Streptococcus
Direct Test, or GASDirect assay, is a rapid NAT assay for the
direct detection of Streptococcus pyogenes in one hour
from a throat swab. Sensitivity and specificity are equivalent
to culture methods taking 72 hours to complete and are
higher than the rapid membrane antigen tests often used in
physician offices. The test provides fast and accurate results,
eliminates subjective interpretation by the laboratory
technician, and aids physicians in making more informed
treatment decisions. The product’s ease of use enables
efficient batch testing. An automatic pipetting option offers
greater workflow economies and laboratory productivity.
PACE Product Family. Our NAT assays have proven to be
more sensitive and specific than traditional enzyme immunoassay
methods. Our PACE 2C was the first advanced NAT product to offer
the convenience of testing for both chlamydia infections and
gonorrhea from a single patient specimen. This feature
eliminates the need to collect separate specimens and the need
to transport the specimens under different conditions. The PACE
2C continues to meet the needs of today’s clinical
laboratories that prefer a cost-effective, non-amplified NAT
assay for routine screening for chlamydia infections and
gonorrhea. Other products in the PACE 2 product line include
individual tests to separately detect and confirm both chlamydia
infections and gonorrhea. The PACE product family also includes
the PACE Specimen Collection kits for endocervical and urethral
swab specimens. Sales of our PACE family of assays accounted for
16% of our total revenues in 2005, 20% of our total revenues in
2004 and 29% of our total revenues in 2003. The decrease in the
percentage of total revenues represented by our PACE family of
assays is attributable to two factors. First, our total revenues
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are increasing primarily due to growth in our blood-screening
segment, which lowers the overall contribution of the clinical
diagnostic revenues as a percentage of total revenues. Second,
we are actively converting our PACE 2C customers to our
amplified APTIMA Combo 2 product line which, while partially
decreasing PACE family revenues, ultimately contributes to total
clinical diagnostic product sales growth.
Mycobacterium Tuberculosis Direct Test. Amplification is
particularly important when detecting pathogens present at low
levels, as is often the case with tuberculosis. Culture tests
for TB can take six to eight weeks for a preliminary result,
often resulting in a patient not receiving appropriate treatment
on a timely basis or receiving unnecessary treatment. Our
amplified Mycobacterium Tuberculosis Direct, or MTD, test has
sensitivity similar to a culture test but can detect the TB
pathogen within a few hours. The test is performed directly on a
patient sample, and can be used to quickly differentiate between
TB and other mycobacteria, resulting in reduced isolation time
and treatment of an infected patient. Our MTD assay was the
first amplified NAT assay for obtaining same day results from
sputum samples.
APTIMA Combo 2. To meet market demand for amplified STD
assays, we developed our APTIMA Combo 2 assay, which received
FDA approval in May 2001 and was launched commercially in August
2001. Acceptance of first generation amplified tests was
adversely affected by the complexity of the methodology and the
lack of a format suitable for use in the average laboratory.
APTIMA Combo 2, which uses second generation amplification
technologies, allows us to overcome these barriers. The test
offers superior performance and ease of use, including its use
of a penetrable cap that eliminates the need to uncap samples
prior to testing and a sample transport medium that preserves
the integrity of the sample for several weeks at room
temperature.
We believe the assay is ideally suited to test specimens from
both symptomatic and asymptomatic individuals. Symptomatic
individuals typically have large amounts of the microorganism
present at the infection site, while patients who are
asymptomatic typically have much lower levels of the
microorganism present at the infection site. APTIMA Combo 2 has
the sensitivity and specificity to detect chlamydia infections
and gonorrhea from both symptomatic and asymptomatic individuals.
In addition to amplification technology, our APTIMA Combo 2
assay utilizes the latest versions of our core technologies,
including target capture, HPA and DKA. APTIMA Combo 2 will
qualitatively detect and differentiate rRNA from Chlamydia
trachomatis and Neisseria gonorrhoeae bacteria. This
continues the “one test, two results” advantage we
first provided with our PACE 2C non-amplified assay for
chlamydia infections and gonorrhea. We believe we are in a
unique position to provide both amplified and non-amplified
assays for these infections. This allows us to compete
effectively in the STD testing market and to provide the
appropriate NAT solution to meet the needs of many different
customers.
Our APTIMA Combo 2 assay is the first clinical diagnostic assay
approved for use on the fully automated TIGRIS instrument. Our
APTIMA Combo 2 assay is also performed on our semi-automated DTS
instruments. In January 2004, we received FDA approval for the
APTIMA Vaginal Swab Specimen Collection Kit, the first kit that
enables patients to self-collect vaginal swab specimens to be
tested for Chlamydia trachomatis and Neisseria
gonorrhoeae using the APTIMA Combo 2 assay.
In August 2005, the FDA granted marketing clearance to use the
APTIMA Combo 2 assay to test for Chlamydia trachomatis
and Neisseria gonorrhoeae from liquid Pap specimens
collected and processed with Cytyc Corporation’s ThinPrep
2000 system. This new use provides physicians the convenience of
intercepting Chlamydia infections and gonorrhea from the same
sample collected for the ThinPrep Pap Test. The Pap test remains
the most widely used screening test in the United States for the
early detection of cervical cancer. Approximately
50 million Pap tests are performed annually in the United
States, 80% of which are liquid-based. We anticipate filing for
regulatory clearance in the United States of a similar
application from TriPath’s liquid Pap transport media in
2006.
APTIMA CT, APTIMA GC and APTIMA Trichomoniasis ASR. To
provide our customers with greater flexibility for their STD
testing needs, we also have developed individual APTIMA assays
to separately detect the presence of Chlamydia trachomatis
and Neisseria gonorrhoeae, which received FDA
approval in December 2004 and March 2005, respectively. We also
have developed ASRs to detect the parasite
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Trichomonas vaginalis that causes the sexually
transmitted disease trichomoniasis. Trichomoniasis is one of the
most common sexually transmitted diseases that mainly affects
sexually active women. It is estimated by the CDC that
7.4 million new cases occur annually in the United States.
ASRs comprise a category of in vitro diagnostic reagents to
bridge the gap between research and assays that have received
FDA approval. The FDA has created a series of regulations
governing these reagents. ASRs use a collection of specific
reagents that, when combined with general purpose reagents, give
clinical diagnostic testing laboratories the ability to build
diagnostic tests often referred to as “home-brew”
tests. ASRs allow diagnostic companies to deliver reagents to
the market rapidly, as most ASRs are exempt from FDA submissions.
Clinical Diagnostic Products for the Detection of Viral
Microorganisms. In 1996, we were selected by the National
Heart, Lung and Blood Institute of the National Institutes of
Health, or NIH, to develop reagents and instrumentation for the
blood donor screening market using our core technologies. Our
work under the NIH contract also launched us into development of
products for detection of viral microorganisms in the clinical
diagnostic market. We produce qualitative diagnostic tests that
can determine whether the virus is present, and quantitative
tests that can determine the amount of the virus. These viral
diagnostic assays include a qualitative HCV test and an ASR for
quantitative HCV testing, as set forth below, and currently are
run on our semi-automated instruments incorporating components
of our DTS instrument.
Clinical Diagnostic Products for the Detection of Viral
Microorganisms
| Target | FDA | Commercial | |||||||||||
| Product Line | Principal Technologies | Microorganism | Clearance/Approval | Distribution | |||||||||
|
Qualitative HCV Assay |
Target Capture, Transcription-Mediated Amplification of viral RNA, detection by Dual Kinetic Assay | HCV | November 2002 | Bayer — Worldwide | |||||||||
|
ASR for Quantitative HCV Testing |
Target Capture, Transcription-Mediated Amplification of viral RNA, detection by Hybridization Protection Assay | HCV | Not required | Bayer — U.S. | |||||||||
Qualitative HCV Assay. We developed an amplified TMA
assay for the qualitative detection of HCV based on the same
technology used in our FDA-approved Procleix HIV-1/ HCV assay
for screening donated blood. In collaboration with Bayer
Corporation, we completed clinical trials in the United States
for this assay in February 2002, and in November 2002, we
received pre-market approval from the FDA. Bayer currently
distributes this assay under the trademark VERSANT in the United
States and other international markets under our collaboration
agreement.
ASR for Quantitative HCV Testing. We also have developed,
through our collaboration with Bayer, an ASR to quantitatively
determine the amount of HCV present in a sample. This ASR
currently is provided by Bayer to Quest Diagnostics
Incorporated, a leading national diagnostics company.
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| Blood Screening Products. |
In 1996, the National Heart, Lung and Blood Institute of the NIH
selected us to develop reagents and instrumentation for the
blood donor screening market based on our core technologies. We
completed our development of the NAT assays for HIV-1 and HCV
for blood screening contemplated by the NIH contract in February
2002 incorporating our core technologies of target capture, TMA
and DKA. The principal blood screening products that we have
developed are set forth below.
Blood Screening Products
| FDA | Commercial | ||||||||||||
| Product Line | Principal Technologies | Target Microorganism(s) | Clearance/Approval | Distribution | |||||||||
|
Procleix HIV-1/ HCV Assay |
Target Capture, Transcription- Mediated Amplification of viral RNAs, detection by Dual Kinetic Assay | HIV-1 and HCV in donated blood | February 2002 | Chiron — Worldwide | |||||||||
|
Procleix WNV Assay |
Target Capture, Transcription- Mediated Amplification of viral RNAs, detection by Dual Kinetic Assay | WNV in donated blood | December 2005 | Chiron — U.S. | |||||||||
|
Procleix Ultrio Assay |
Target Capture, Transcription- Mediated Amplification of viral RNAs, detection by Dual Kinetic Assay | HIV-1, HCV and HBV in donated blood | Not approved | Chiron — Worldwide (except U.S.) | |||||||||
In 1998, in collaboration with Chiron, we were selected by The
American Red Cross to provide it with an HIV-1/ HCV assay for
testing pooled blood samples under an IND filed with the FDA.
The Red Cross is the largest supplier of blood, plasma and
tissue products in the United States. The Red Cross provides
almost half of the nation’s entire blood supply through its
36 region national network. The Gen-Probe/ Chiron collaboration
subsequently entered into similar arrangements with
America’s Blood Centers and American Independent Blood
Centers. As a result of these and other implementations, we
estimate that our Procleix HIV-1/ HCV assay is currently
utilized to screen over 80% of the United States donated blood
supply. The Procleix HIV-1/ HCV assays supplied under the IND
were delivered on a cost recovery basis.
The FDA approved our BLA for the Procleix HIV-1/ HCV assay in
February 2002. As a result of FDA approval, Chiron began in the
second quarter of 2002 to sell the assay at commercial prices to
United States customers, which resulted in our recognizing
increased revenues. The Procleix HIV-1/ HCV assay has received
approval in the United States, some European countries, and in
Asia. Regulations adopted by the European Union, or EU, required
all imported in vitro diagnostic products, including our
existing blood screening assays, to be registered and receive
“CE” mark approval by December 7, 2003 or before
further distribution after that date. Products already in the EU
supply chain on that date were permitted to remain in
distribution for two additional years. We received CE mark
approval for our initial Procleix HIV-1/ HCV blood screening
assay in February 2003, for the Procleix Ultrio assay in January
2004, and for the TIGRIS instrument, used in conjunction with
the Procleix Ultrio assay, in December 2004.
As noted above, most blood collection centers currently screen
donated blood by taking samples from separate units and then
conducting a probe-based test on the pooled samples. The
Procleix assay is performed on the eSAS instrument system, which
provides sufficient throughput for screening pooled samples of
donated blood. However, we believe that the FDA will ultimately
require testing of each unit of blood individually. Because of
the unit volume of donated blood, testing all units individually
is currently impractical without fully automated
instrumentation. Accordingly, we have invested in the
development of the TIGRIS instrument, which we believe will
provide the automation necessary to facilitate individual donor
testing.
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In collaboration with Chiron, we have developed the Procleix
Ultrio assay for the simultaneous detection of HIV-1, HCV and
HBV, which we believe will further drive demand for our blood
screening products. The test is distributed and marketed by
Chiron. The Procleix Ultrio assay is designed to detect the
presence of all known HIV-1 groups and subtypes and HCV and HBV
genotypes in human plasma during the very early stages of
infection, when those agents are present but cannot be detected
by immunodiagnostic tests. The HBV component of the assay has
the potential to reduce the window period between infection and
detection of HBV by up to 42% from the window period associated
with new generation surface antigen tests. The Procleix Ultrio
assay for use on our semi-automated instrument for export
received its CE mark in January 2004. In December 2004, the
TIGRIS instrument received a CE mark for use with the previously
CE marked Procleix Ultrio assay enabling us to begin
commercialization of the Procleix Ultrio assay for use on the
TIGRIS instrument in the European Economic Area, as well as in
other parts of the world that accept the CE mark. During the
third quarter of 2004, we submitted a BLA to the FDA to permit
commercial sales of the Procleix Ultrio assay in the United
States. We intend to seek approval in the United States to run
the test on both eSAS and on the fully-automated TIGRIS
instrument.
In October 2005, the FDA notified us that it considers our
TIGRIS instrument for blood screening “not substantially
equivalent” to our already cleared eSAS for screening
donated human blood with the Procleix Ultrio assay. The FDA made
this determination in response to our 510(k) application for the
TIGRIS instrument for blood screening. Also in October 2005, we
received a “complete review letter” from the FDA
setting forth questions regarding our BLA for the Procleix
Ultrio assay itself. We anticipate submitting a BLA amendment
for the Procleix Ultrio assay for use on eSAS, responding to the
FDA’s questions, by the end of the first quarter of 2006.
We anticipate submitting a new 510(k) application for the TIGRIS
instrument for use with the Procleix Ultrio assay following
clearance of the TIGRIS instrument for use with the WNV assay.
We anticipate submitting a (post-approval) BLA supplement for
the Procleix Ultrio assay, for use on the TIGRIS instrument,
following approval of the BLA for the Procleix Ultrio assay on
eSAS. There can be no assurance that the Procleix Ultrio assay
will receive regulatory approval by the FDA or that the TIGRIS
instrument will receive FDA clearance for use with the WNV or
Procleix Ultrio assays.
In June 2003, we announced that our WNV assay was available for
use by United States blood collection centers under an IND
application to begin clinical testing of the virus in freshly
donated human blood. We filed a BLA for the WNV assay with the
FDA in January 2005. The development of the WNV assay was
partially funded by the National Heart, Lung and Blood Institute
of the NIH. As of December 2005, blood collection centers in the
United States had used the WNV assay to screen more than
29 million units of donated blood under the IND
application. This testing has resulted in the interception of
approximately 1,500 WNV-infected blood donations. On
December 1, 2005, the FDA granted marketing approval for
our WNV assay on eSAS to screen donated human blood. The 510(k)
clearance of eSAS for use with the WNV assay was granted prior
to the assay’s approval. We intend to submit for 510(k)
clearance of the TIGRIS instrument for use with the WNV assay in
the first part of 2006. We plan to submit a (post-approval)
supplement to our WNV assay BLA, adding the TIGRIS instrument,
at approximately the same time.
| Emerging Diagnostic Applications |
We entered into a license and collaboration agreement with
DiagnoCure to apply our NAT technology in the detection of a
new, highly specific genetic marker for prostate cancer. In
addition, we have licensed multiple potential markers for
genitourinary and other cancers from Corixa, including a gene
called AMACR that we believe is a promising marker for a
molecular-based prostate cancer diagnostic test. We have also
licensed innovative cell capture technology from AdnaGen that
may allow for improved isolation of prostate cancer cells. In
December 2005, we entered into a license agreement with the
Henry M. Jackson Foundation for the Advancement of Military
Medicine, Inc. for access to additional markers that we believe
could help us to further increase the accuracy of our tests for
prostate cancer.
In the industrial market, in July 2005, we entered into a
collaboration agreement with GEI to develop, manufacture and
commercialize NAT products designed to detect the unique genetic
sequences of microorganisms for GEI’s exclusive use or sale
in selected water testing applications. In August 2005, we
entered into a collaboration agreement with Millipore to
develop, manufacture and commercialize NAT products for rapid
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microbiological and viral monitoring for Millipore’s
exclusive use or sale in process monitoring in the biotechnology
and pharmaceutical manufacturing industries. We are currently
evaluating additional product opportunities in other areas of
the industrial testing market.
Instrumentation
We have developed and continue to develop instrumentation and
software that are designed specifically for performing our NAT
assays. We also provide technical support and instrument service
to maintain these systems in the field. Historically, we have
provided our instrumentation to laboratories and hospitals
without requiring them to purchase the equipment or enter into
an equipment lease. Instead, we recover the cost of providing
the instrumentation in the amounts we charge for our diagnostic
assays. We have implemented multi-year sales contracts that have
an equipment factor set forth in them. By placing our
proprietary instrumentation in laboratories and hospitals, we
can establish a platform for future sales of our assays. We
record the revenue associated with the delivery of our
proprietary integrated instrument platforms to customers in
product sales. The costs associated with the instrument are
charged to cost of sales on a straight-line basis over the
estimated life of the instrument, which ranges from three to
five years. The costs to maintain these instruments in the field
are charged to cost of product sales as incurred. For
instruments that will be used for blood screening or in
connection with our clinical diagnostic collaboration with
Bayer, we sell the instrumentation to Chiron and Bayer, and they
are responsible for the placement, maintenance and repair of the
units with their laboratory and hospital customers.
| Luminometers |
We first introduced the LEADER series of luminometers, designed
in conjunction with MGM Instruments, Inc., for use with our PACE
and AccuProbe products and, more recently, the APTIMA product
line. Utilizing advanced chemiluminescent detection, our
luminometers provide high sensitivity, speed, accuracy and
ease-of-use. Currently,
there is an installed base of over 2,000 of our luminometers
worldwide. The LEADER series can accommodate the throughput
needs of low-volume testing laboratories. We have no firm,
long-term commitments from MGM Instruments to supply products to
us for any specific period, or in any specific quantity, except
as may be provided in a particular purchase order. No FDA or
foreign governmental approval is required to sell our current
LEADER series of luminometers in the clinical diagnostic market.
| DTS 400, 800 and 1600 Instruments |
Laboratories need nucleic acid testing solutions that are
accurate, efficient and economical. To meet this demand, we have
developed the family of DTS instruments. The DTS family of
instruments uses direct tube sampling (DTS) technology
consisting of an exclusive penetrable cap on the sample
collection tube to minimize contamination and achieve safer,
more convenient, sample removal. DTS simplifies sample
transport, minimizes handling and greatly reduces laboratory
cross-contamination. These instruments include the DTS 400, DTS
800 and DTS 1600. This is a full line of automated solutions for
low, medium and high-volume laboratories to be used with our
latest generation of NAT assays, including the APTIMA Combo 2
assay. The instrument platforms can also be adapted to perform
the PACE family of assays, GASDirect Test, and AccuProbe Group B
Strep assay.
The DTS 400 instruments are fully-integrated modular instruments
that include a magnetic particle separation and washing system
(target capture system), temperature controlled incubators, a
luminometer, software, on board bar code readers and computers.
The DTS 1600 instruments add the additional capabilities of an
automated pipetting station and can process up to 800 specimens
per day, resulting in 1,600 chlamydia and gonorrhea assay
results per day for the APTIMA Combo 2 assay.
Chiron markets a version of the DTS 1600 instruments, also known
as eSAS, for use in blood screening under the Procleix
trademark. The version of the DTS instruments that Chiron
markets has received FDA approval and foreign governmental
approval in the countries where our blood screening products are
sold.
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Bayer markets systems comprised of components of the DTS
instruments for HCV clinical diagnostic assays. The systems that
Bayer markets do not require FDA or foreign governmental
approval.
| TIGRIS Instrument System |
We have developed the TIGRIS instrument system, or TIGRIS
instrument, which we believe is the first high-throughput
instrument to automate NAT testing, for use in both the clinical
diagnostic and blood screening markets. The TIGRIS instrument
integrates and automates all of the steps associated with our
latest amplified NAT assays, including sample preparation,
sample processing, amplification and detection. It has the
ability to process approximately 500 samples in an eight-hour
shift and up to 1,000 samples in approximately 13 hours,
and two TIGRIS instruments can be operated under the supervision
of a single lab technician.
The TIGRIS instrument is expected to reduce the time, labor
costs, risk of contamination and complexity associated with
performing NAT assays and blood screening. As demonstrated by
the clinical testing of the Procleix WNV TIGRIS assay under an
IND, the throughput of the TIGRIS instrument is sufficient to
allow high volume testing of individual blood donations, rather
than pooled donor samples. In addition, we intend to develop
additional NAT assays that can be performed on the TIGRIS
instrument. The TIGRIS instrument is being utilized in numerous
clinical diagnostic laboratories and blood banks. We have
capitalized $25.1 million of third-party costs that we
incurred to develop TIGRIS software after establishing
technological feasibility. In 2004, we began to amortize the
capitalized software costs associated with the TIGRIS instrument.
Clinical trials for clinical diagnostic testing on the TIGRIS
instrument using our APTIMA Combo 2 assay were completed in June
2003 and a 510(k) premarket notification was filed with the FDA
in July 2003. In December 2003, we received approval from the
FDA for testing for certain STDs on the TIGRIS instrument.
In December 2003, we filed an amended IND with the FDA to
initiate clinical trials of the Procleix Ultrio blood screening
assay on the TIGRIS instrument. We initiated clinical trials of
our Procleix Ultrio assay on the TIGRIS instrument for a blood
screening application in January 2004. We submitted a BLA for
the Procleix Ultrio assay to the FDA during the third quarter of
2004. We intend to seek approval in the United States to run the
test on both eSAS and on the fully automated TIGRIS instrument.
The Procleix Ultrio assay received its CE mark in January 2004
for use on eSAS and in December 2004 we received a CE mark
for the TIGRIS instrument for use with the Procleix Ultrio
assay, enabling us to begin commercialization of the Procleix
TIGRIS system in the European Economic Area, as well as in other
parts of the world that accept the CE mark. In October 2005, the
FDA notified us that it considers our TIGRIS instrument for
blood screening “not substantially equivalent” to our
already cleared eSAS for screening donated human blood with the
Procleix Ultrio assay. The FDA made this determination in
response to our 510(k) application for the TIGRIS instrument for
blood screening. We anticipate submitting a new 510(k)
application for the TIGRIS instrument for use with the Procleix
Ultrio assay following clearance of the TIGRIS instrument for
use with the WNV assay. There can be no assurance that the
TIGRIS instrument will receive FDA clearance for use with the
WNV or Procleix Ultrio assays.
Marketing and Sales
We market our products for the clinical diagnostics market to
laboratories in the United States and Canada through our direct
sales force. We also market our APTIMA products in certain
European countries through our direct sales force. As of
December 31, 2005, our direct sales force consisted of a
staff of approximately 41 sales representatives. We also support
our sales efforts through a staff of 16 field technical
representatives. Our sales representatives have an average of
approximately 20 years of overall sales experience, with an
average of approximately eight years focused on sales of NAT
products. Sales representatives principally focus on large
accounts including large reference laboratories, public health
laboratories and hospitals throughout North America and
generally do not focus on physicians at this time. We educate
our sales representatives on the technical, clinical and
economic merits of our products. We use sales meetings,
technical on-line sales training and
in-the-field training
to ensure our sales representatives are
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properly informed about all areas of our product lines and
selling processes. Our blood screening products are marketed and
distributed by Chiron.
| Marketing Strategy |
The focus of our marketing strategy is to solidify awareness of
the superiority of our technology, illustrate the cost
effectiveness of this technology and continue to differentiate
our products from those of our competitors. We intend to
continue targeting our marketing efforts to various levels of
laboratory and hospital management through research
publications, print advertisements, conferences and the
Internet. We attend various national and regional industry
conferences throughout the year. Our web site is used for
educating existing and potential customers about our assays and
contains our entire directory of products, on-line technical
materials and links to related medical sites.
| Sales Strategy |
We concentrate our selling efforts on the management teams of
laboratories and hospitals. Our sales representatives are able
to recommend the appropriate business solution to meet the needs
of our customers by presenting multiple NAT technology and
instrumentation options. Sales representatives are trained to
find new product opportunities, offer diagnostic solutions to
address unmet customer needs, and provide comprehensive
after-sale product support. In addition, our field technical
support group provides training and ongoing technical support
for all of our NAT products.
Distribution
We have entered into an agreement with bioMérieux for
distribution of certain of our microbial non-viral diagnostic
products in Europe and various countries in Asia (other than
Japan), Australia, South America and Mexico. We have entered
into an agreement for distribution of our microbial non-viral
diagnostic products in Japan with Chugai Diagnostics Science,
which was acquired by Fujirebio in 2002. Fujirebio renamed the
company Rebio Gen, Inc. In other countries, we utilize
independent distributors with experience and expertise in
clinical diagnostic products.
The viral diagnostic products we manufacture under our
collaboration agreement with Bayer and the blood screening
products we manufacture under our collaboration agreement with
Chiron are marketed and distributed by those companies. We are
currently involved in arbitration proceedings with Bayer
regarding its distribution rights under the collaboration
agreement.
Customers
The primary customers for our clinical diagnostic products
include large reference laboratories, public health laboratories
and hospitals. Our blood screening collaboration with Chiron
accounted for 52% of our total revenues in 2005 and 47% of our
total revenues in 2004. Our blood screening collaboration with
Chiron is largely dependent on two large customers in the United
States, The American Red Cross and America’s Blood Centers,
but we did not receive any revenues directly from these
entities. Chiron was our only customer that accounted for
greater than 10% of our total revenues in 2005. In addition,
Quest Diagnostics, Laboratory Corporation of America Holdings
and various state and city public health agencies accounted for
an aggregate of 20% of our total revenues in each of 2005 and
2004. Although state and city public health agencies are legally
independent of each other, we believe they tend to act similarly
with respect to their purchasing decisions.
Corporate Collaborations and Strategic Arrangements
| Agreement with Chiron Corporation |
In June 1998, we entered into a strategic alliance with Chiron
to develop and market NAT-based products for the blood screening
and clinical diagnostic markets. Chiron subsequently assigned
the clinical diagnostics portion of the agreement to Bayer. The
Gen-Probe/ Chiron alliance initially developed and is
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manufacturing and marketing the combination HIV-1/ HCV assay for
qualitative screening of blood and blood products under the
Procleix name. Additional blood screening assays, such as the
Procleix Ultrio assay and the WNV assay, have been developed
through the collaboration and are discussed elsewhere in this
document. In the event that any third-party technology is needed
to continue development under the collaboration agreement, costs
for obtaining such third-party technology will be allocated
between the parties.
Under the agreement, our share of revenues from the initial
Procleix HIV-1/ HCV assay through 2003 ranged from 43% to 47.5%
after deduction of appropriate expenses. Effective
January 1, 2004, we amended the agreement to permanently
fix our share at 45.75% of net revenues for assays that include
a test for HCV after deduction of appropriate expenses. For
commercial assays that do not test for HCV, such as the WNV
assay, the agreement remains unchanged, with each party
retaining 50% of the net revenues after deduction of appropriate
expenses. The amendment also eliminates the possibility of
Chiron appointing a third party distributor in the United States
to sell these products.
The collaboration agreement has an initial term of 10 years
from the first commercial sale of a blood screening assay
following FDA approval, which occurred in the first quarter of
2002. The agreement may be extended by the development of new
products under the agreement, so that it will expire upon the
later of the end of the initial term or five years after the
first commercial sale of the last new product developed during
the initial term. The agreement can be terminated by a party
earlier if the other party materially breaches the agreement and
does not cure the breach following 90 days’ notice or
if the other party becomes insolvent or declares bankruptcy.
All rights and title to inventions discovered under the
collaboration agreement belong to the party who developed the
invention, or to both parties, if both parties developed the
invention. However, if one party uses confidential information
relating to the core technology of the other party to develop an
invention that improves on, and whose use would infringe on, the
core technology of the other party, then the other party will
have the exclusive option to acquire all rights and title to the
invention on commercially reasonable terms, except in certain
situations where the invention will be jointly owned.
In January 2004, we began United States clinical trials of the
Procleix Ultrio assay on the TIGRIS instrument system,
triggering a $6.5 million contract milestone payment from
Chiron that we recorded during the first quarter of 2004. During
January 2004, the Procleix Ultrio assay, running on our
semi-automated instrument, received its CE mark, which permitted
Chiron to launch the product in the European Economic Area. In
December 2004, use of the TIGRIS instrument with the previously
CE marked Procleix Ultrio assay received a CE mark enabling the
commercialization of the Procleix TIGRIS system in the European
Economic Area, as well as in other parts of the world that
accept the CE mark.
From inception through December 31, 2005, we recognized a
total of $476.5 million in revenue under this collaboration
agreement and had recorded $5.0 million in deferred license
revenues as of December 31, 2005.
The collaboration agreement provides that Chiron pay us a
$10 million milestone upon FDA approval of the Procleix
Ultrio assay on the TIGRIS instrument. We believe that this
approval is more likely in 2007 than in 2006. There can be no
assurance that the Procleix Ultrio assay will receive regulatory
approval by the FDA or that the TIGRIS instrument will receive
FDA clearance for use with the Procleix Ultrio assay.
On October 30, 2005, Chiron announced that it entered into
a merger agreement with Novartis AG. In the event the merger is
consummated, Chiron will become a wholly-owned subsidiary of
Novartis. We do not know whether the merger will be consummated
or, if consummated, what effect, if any, it will have on our
relationship with Chiron.
| Agreement with Bayer Corporation |
In 1998, following the execution of our agreement with Chiron,
Chiron assigned the clinical diagnostic portion of the agreement
to Bayer. Under the terms of our collaboration with Bayer, we
will develop, manufacture and market with Bayer NAT assays for
viral targets and cancer markers in the clinical diagnostic
market. Pursuant to the collaboration, we and Bayer initially
developed and are manufacturing and marketing quantitative ASRs
and qualitative assays for HCV. In the event that any
third-party technology is needed to
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continue development under our collaboration agreement with
Bayer, costs for obtaining such third-party technology will be
allocated between the parties. In addition, either party has the
right to separately pursue obtaining rights to cancer markers
necessary for the development of NAT assays.
Under the terms of this agreement, Bayer agreed to pay us a
combination of transfer prices and royalties on product sales.
From inception through December 31, 2005, we recognized a
total of $12.0 million in revenue under our collaboration
agreement with Bayer, including $1.4 million in revenue
during 2005.
The collaboration agreement has an initial term of 10 years
from the first commercial sale of a clinical diagnostic assay
subject to the agreement, which occurred in the second quarter
of 2000. The agreement may be extended by the development of new
products under the agreement, so that it will expire upon the
later of the end of the initial term or five years after the
first commercial sale of the last new product developed during
the initial term. The agreement can be terminated earlier if a
party materially breaches the agreement and does not cure the
breach following 90 days’ notice from the
non-breaching party or if a party becomes insolvent or declares
bankruptcy.
All rights and title to inventions discovered under the
collaboration agreement belong to the party who developed the
invention, or to both parties, if both parties developed the
invention. However, if one party uses confidential information
relating to the core technology of the other party to develop an
invention that improves on, and whose use would infringe on, the
core technology of the other party, then the other party will
have the exclusive option to acquire all rights and title to the
invention on commercially reasonable terms, except in certain
situations where the invention will be jointly owned.
In November 2002, we initiated an arbitration proceeding against
Bayer in connection with our clinical diagnostic collaboration.
Under the terms of the collaboration agreement, Bayer acquired
the exclusive right to distribute nucleic acid diagnostic tests
designed and developed by us for the detection of HIV, hepatitis
virus and other specified viruses, subject to specific
conditions. Our demand for arbitration stated that Bayer has
failed to fulfill the conditions required to maintain exclusive
distribution rights. In June 2005, the arbitrator issued an
Interim Opinion and Award and determined, among other things,
that we are entitled to a co-exclusive right to distribute
qualitative Transcription-Mediated Amplification, or TMA, assays
to detect HCV and HIV-1 for the remaining term of the agreement.
Bayer previously held the exclusive rights to market these
products. We will be required to pay running sales royalties to
Bayer on sales of the TMA assays for HCV and
HIV-1, at rates we
believe are generally consistent with rates paid by other
licensees of the relevant patents. The arbitrator also
determined that the collaboration agreement should be
prospectively terminated, as we requested. As a result of a
termination of the agreement, we will have the right to develop
and market future viral assays that had been previously reserved
for Bayer. Bayer will retain co-exclusive rights to distribute
two products that it currently markets. The arbitrator’s
final decision in this matter is subject to a right to appeal to
an arbitration appeal panel within JAMS. There can be no
assurances as to the final outcome of the arbitration.
| National Institutes of Health Contracts |
In October 2002, we received a $1.0 million contract
extension from the NIH to develop a NAT assay for the detection
of the West Nile virus. The NIH allocated an additional
$2.5 million to the contract extension in February 2003.
In November 2003, we received $4.3 million of supplemental
contract funding from the NIH. This contract extension supported
our pursuit of clinical studies and the submission on
January 27, 2005 of our BLA for our nucleic acid test for
the detection of WNV in donated human blood.
| Distribution Agreement with Rebio Gen |
In September 1998, we entered into a distribution agreement with
Chugai Diagnostics Science Co., Ltd., a subsidiary of our parent
corporation at that time, for the distribution of our non-viral
diagnostic products in Japan. During 2002, Chugai Pharmaceutical
sold Chugai Diagnostics Science Co., Ltd. to Fujirebio Inc., a
Japanese life sciences company, which re-named the company Rebio
Gen, Inc. From inception through
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December 31, 2005, we recognized $21.4 million in
sales revenue under this distribution agreement, including
$3.2 million in sales revenue during 2005. The distribution
agreement with Rebio Gen, as amended, currently expires by its
terms on March 31, 2006. We are currently discussing an
extension of the agreement with Rebio Gen. Prior to expiration,
this agreement may be terminated by either party upon a material
breach of this agreement that is not cured following
60 days’ written notice, unless the material breach
relates to an obligation to make payments under the agreement,
in which case a 30 day cure period applies. This agreement
may also be terminated if a party becomes insolvent or declares
bankruptcy, ceases to be actively engaged in business, or
engages in or is charged with unethical or illegal behavior that
jeopardizes the reputation and goodwill of either party.
| Purchase and Supply Agreement with Roche |
In February 2005, we entered into a supply and purchase
agreement with F. Hoffman-La Roche Ltd. and its affiliate
Roche Molecular Systems, Inc. Under this agreement, Roche agreed
to manufacture and supply us with DNA oligonucleotides for HPV.
We plan to use these oligonucleotides in molecular diagnostic
assays. Pursuant to the agreement, we paid Roche manufacturing
access fees of $20.0 million in May 2005 and will pay
$10.0 million within 10 days of the occurrence of
certain future commercial events, but not later than
December 1, 2008. We also agreed to pay Roche transfer fees
for the HPV oligonucleotides. The agreement terminates upon the
expiration of certain Roche patent rights relevant to the
agreement and may be terminated by either party upon a material
breach of the agreement by the other party that is not cured
following 60 days’ written notice and in certain other
limited circumstances.
| Research Agreement with GSK |
In June 2005, we entered into a research agreement with
SmithKline Beecham Corporation, doing business as
GlaxoSmithKline, and SmithKline Beecham (Cork) Ltd., together
referred to as GSK. Under the terms of the agreement, we agreed
to provide our investigational PCA3 assay to test up to 6,800
clinical samples obtained from patients enrolled in GSK’s
REDUCEtm
(REduction by DUtasteride of prostate Cancer Events) clinical
trial, which is designed to determine the efficacy and safety of
GSK’s drug dutasteride
(AVODART®)
in reducing the risk of prostate cancer in men at increased risk
of this disease. We agreed to reimburse GSK for expenses that
GSK incurs for sample collection and related processes during
the four-year prospective clinical trial. We also agreed to
provide the PCA3 assay without charge and to pay third party
clinical laboratory expenses for using the assay to test the
samples. The agreement terminates on the earlier of six years
from the commencement date or two years after certain clinical
data is unblinded. GSK may terminate the agreement upon notice
to us and we may terminate the agreement on specific dates
provided certain conditions are met. Each party may also
terminate the agreement for material breaches and in certain
other limited circumstances.
| Collaboration Agreement with GEI |
In July 2005, we entered into a collaboration agreement with GEI
to develop, manufacture and commercialize NAT products designed
to detect the unique genetic sequences of microorganisms for
GEI’s exclusive use or sale in selected water testing
applications. Under the terms of the agreement, we will be
primarily responsible for assay development and manufacturing,
while GEI will manage worldwide commercialization of any
products resulting from the collaboration. The agreement
terminates on the later of the date that is ten years after the
first commercial sale or use of the first assay developed under
the agreement and five years after the first commercial sale or
use of the last assay launched prior to the ten year period
specified above. In addition, either party may terminate the
agreement upon a breach of a material provision of the agreement
by the other party that is not cured following
90 days’ written notice and in certain other limited
circumstances.
| Collaboration Agreement with Millipore |
In August 2005, we entered into a collaboration agreement with
Millipore to develop, manufacture and commercialize NAT products
for rapid microbiological and viral monitoring for
Millipore’s exclusive use or
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sale in process monitoring in the biotechnology and
pharmaceutical manufacturing industries. Under the terms of the
agreement, we will be primarily responsible for assay
development and manufacturing, while Millipore will manage
worldwide commercialization of any products resulting from the
collaboration. The agreement terminates upon the expiration of
any two-year period during which there has been no development
work conducted under the agreement or no first commercial sale
of a product developed under the agreement. In addition, either
party may terminate the agreement upon a material breach of the
agreement by the other party that is not cured following
120 days’ written notice and in certain other limited
circumstances.
| Agreements with Molecular Profiling Institute, Inc. |
In October 2005, we entered into agreements with Molecular
Profiling Institute, Inc. to accelerate market development for
our cancer diagnostics. Under the terms of the agreements,
Molecular Profiling has agreed to validate, commercialize and
undertake market development activities for up to four of our
products, starting with our ASRs to detect PCA3, a genetic
marker for the detection of prostate cancer. The agreements may
be terminated, with required notice, upon a material breach and
in certain other limited circumstances. In addition, we
purchased $2.5 million of Series B Preferred Stock of
Molecular Profiling.
Technology Licenses
| Licenses of Our Technology We Have Granted to Other Companies |
Agreements with bioMérieux. In May 1997, we entered
into collaborative research agreements with bioMérieux
Vitek, Inc., which created a worldwide relationship between
bioMérieux and us.
In August 2000, we entered into amended agreements with
bioMérieux, Inc. that transitioned the relationship from a
collaborative arrangement to two royalty-bearing license
agreements covering a semi-automated instrument and associated
probe assays and an advanced fully-automated instrument and
probe assays, both for the diagnosis of infectious diseases and
detection of food pathogens. In September 2004, we entered into
a termination agreement with bioMérieux, which terminated
one of the August 2000 license agreements. Pursuant to the
termination agreement, bioMérieux paid us an aggregate of
approximately $1.6 million to conclude certain outstanding
royalty and other obligations under the terminated license
agreement. Further, we paid $1.0 million to bioMérieux
to gain access to bioMérieux’s intellectual property
for detecting genetic mutations that predispose people to blood
clotting disorders.
In September 2004, at the same time we entered into the
termination agreement, we also entered into non-exclusive
licensing agreements with bioMérieux and its affiliates
that provide bioMérieux’s affiliates options to access
our ribosomal RNA technologies for certain uses. We refer to
these agreements as the Easy Q agreement and the GeneXpert
agreement. Pursuant to the terms of these agreements,
bioMérieux’s affiliates paid us an aggregate of
$250,000 for limited non-exclusive, non-transferable, research
licenses, without the right to grant sublicenses except to
affiliates, and non-exclusive, non-transferable options for
licenses to develop diagnostic products for certain disease
targets using our patented ribosomal RNA technologies. The first
of these options was exercised by bioMérieux’s
affiliates’ payment to us of $4.5 million in January
2005. In December 2005, bioMérieux’s affiliates
exercised a second option and paid us $2.1 million. We
recognized an aggregate of $3.9 million as license revenue
in 2005 as a result of these payments. bioMérieux’s
affiliates may acquire rights to develop products for additional
targets, if any, by paying us up to an additional
$0.9 million, the exact total amount based on the number of
additional targets, if any, selected by bioMérieux’s
affiliates by the end of 2006. Under each license, we will
receive royalties on the net sale of any products
bioMérieux and its affiliates develop using our
intellectual property. The resulting license agreements
terminate upon the expiration of the last to expire patent
covered by the agreement. In the event of a change in control
with respect to bioMérieux or its affiliates, we have the
right to terminate these agreements, and the respective licenses
granted to bioMérieux’s affiliates thereunder, upon
60 days prior written notice to bioMérieux delivered
within six (6) months of the date of the change in control.
The respective obligations of bioMérieux’s affiliates
under the agreements is guaranteed by bioMérieux SA, the
parent company of the bioMérieux affiliates that are
parties to the agreements. We will record revenue based on the
total number of targets eventually selected.
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On February 3, 2006, bioMérieux terminated the second
of the two August 2000 license agreements. Upon payment of
minimum royalties for 2006 in the amount of $500,000,
bioMérieux will not have any further obligations under the
terminated license. Termination of the second August 2000
license does not affect the September 2004 licenses.
Through December 31, 2005, we recognized a total of
$58.0 million in revenue under the agreements, including
$7.7 million during 2005.
License Agreement with Rebio Gen. In July 2001, we
entered into a license agreement with Chugai Diagnostics Science
Co., Ltd., a subsidiary of our parent corporation at that time.
In September 2002, Chugai Diagnostics Science Co., Ltd. was
acquired by Fujirebio, which re-named the company Rebio Gen,
Inc. The license agreement has an initial term of 10 years,
with automatic renewal for consecutive one year terms unless one
party gives the other party notice 90 days prior to the end
of the current term. Under the terms of this agreement, we
granted Chugai Diagnostics Science Co., Ltd. a non-exclusive
license for Japan in the field of human clinical diagnostics to
various of our proprietary technologies, including TMA and HPA
technology. All rights and title to any discovery, invention or
improvement made by Rebio Gen as a result of access to our
patent rights licensed under the agreement belong solely to
Rebio Gen. We received a license fee and a royalty payment for
sales made prior to the effective date of the agreement and will
receive royalty payments from any products incorporating the
licensed technology, including those developed and
commercialized by Rebio Gen, until the expiration of our patents
incorporated in these products, which is expected to occur in
December 2020. From inception through December 31, 2005, we
have recognized a total of $3.1 million in revenue under
this agreement, including $0.3 million in revenue during
2005. This agreement may be terminated by either party upon
breach of the agreement that is not cured following
60 days’ written notice. We also received rights to
distribute outside of Japan any products that may be developed
by Rebio Gen under the license.
Non-Exclusive License with Becton Dickinson and Company.
In September 1995, we granted Becton Dickinson a non-exclusive
worldwide license to make, have made, use, sell and import
products that utilize rRNA for the diagnosis of vaginosis and
vaginitis in humans. Becton Dickinson paid us an up front
license fee and has agreed to pay us royalties for the life of
the licensed patents. From inception through December 31,
2005, we have recognized a total of $4.3 million in revenue
under this agreement, including $0.9 million in revenue
during 2005. Becton Dickinson’s obligations to make royalty
payments under this agreement terminate when the patents that
are the subject of this agreement expire, which is expected to
occur in March of 2015. Becton Dickinson can terminate the
agreement at any time on
30-days prior written
notice.
Cross Licensing Agreements with Tosoh. In December 2003,
we entered into agreements with Tosoh Corporation to
cross-license intellectual property covering certain NAT
technologies. The licenses, which were effective
January 1, 2004, cover products in clinical
diagnostics and other related fields. Under the agreements,
Tosoh received non-exclusive rights to our proprietary TMA and
rRNA technologies in exchange for two payments to us totaling
$7.0 million in 2004. Additionally, Tosoh will pay us
royalties on worldwide sales of any products that employ our
technologies licensed by Tosoh. We will gain access, in exchange
for royalty payments to Tosoh, to Tosoh’s patented TRC
amplification and INAF detection technologies for use with our
real time TMA. The agreements terminate at various times
commencing in July 2010 through the expiration of the last to
expire patents subject to the agreements and may be terminated
by a party upon material breach of the agreement by the other
party that is not cured following 60 days’ written
notice.
| Licenses We Have Obtained to Third-Party Technology |
Co-Exclusive License from Stanford University. In August
1988, we obtained a license from Stanford University granting us
rights under specified patent applications covering nucleic acid
amplification methods related to TMA. This license was amended
in April 1997. Under the amended license agreement, we are the
co-exclusive worldwide licensee of the Stanford amplification
technology, with Organon Teknika as the only other permitted
Stanford licensee. We paid a license fee and are obligated to
make royalty payments to Stanford based on net sales of products
incorporating the licensed technology, subject to a minimum
annual royalty payment. From inception through December 31,
2005, we incurred a total of $4.3 million in expenses under
this agreement, including $1.6 million in expenses during
2005. Our obligation to make royalty
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payments under this agreement terminates when the patents
constituting the Stanford amplification technology expire, which
is expected to occur in July 2017. This agreement may be
terminated by Stanford upon a material breach of the agreement
by us that is not cured following 60 days’ written
notice.
Non-Assertion Agreement with Organon Teknika B.V. In
February 1997, we entered into a non-assertion agreement with
Organon Teknika. Both parties possessed certain rights regarding
transcription-based amplification methods. The agreement allows
both parties to practice their respective amplification methods
with immunity from legal action from the other party for
actually or allegedly infringing each other’s patent
rights. The agreement terminates upon the expiration of the last
of the patent rights that are subject to the agreement, which is
expected to occur in July 2017. This agreement also may be
terminated by Organon Teknika upon a material breach of the
agreement by us that is not cured following 90 days’
written notice. In July 2001, Organon Teknika merged with
bioMérieux.
License from University of Wales College of Medicine. Our
wholly-owned subsidiary, Molecular Light Technology Limited and
its subsidiaries, collectively referred to as MLT, have
exclusive rights, with rights to sublicense, under a license
from the University of Wales College of Medicine, or UWCM, to
patents covering AE chemiluminescence technology. In 1986, prior
to our acquisition of MLT, we entered into an agreement with MLT
and UWCM pursuant to which we obtained an exclusive sublicense
to the technology for use in NAT assays. This technology is an
important component of our products and is used to reveal when a
probe has bound to its target sequence. We will own all
improvements to the chemiluminescence technology that we
develop. The agreement terminates upon the expiration of the
last of the patent rights that are subject to the agreement,
which is expected to occur in August 2007. Subsequent to our
acquisition of a majority ownership of MLT in August 2003,
through December 31, 2005, we paid royalties to UWCM
totaling $4.6 million, including $1.6 million in 2005.
The agreement with UWCM may also be terminated by a party upon
breach of the agreement that is not cured following a specified
notice provision.
Non-Exclusive License from Vysis, Inc. In June 1999, we
obtained a non-exclusive license from Vysis granting us rights
under certain patents covering methods which combine target
capture technology with certain nucleic acid amplification
methods. We paid a license fee and became obligated to make
royalty payments to Vysis based on sales of products
incorporating the licensed technology. The agreement terminates
upon the expiration of the last of the patent rights that are
subject to the agreement, which is expected to occur in July
2015. In December 2001, Vysis was acquired by Abbott
Laboratories, Inc., one of our principal competitors.
In September 2004, following litigation between the parties
concerning the scope, validity and enforceability of the
licensed patents, we entered into a settlement agreement and an
amendment to the non-exclusive license agreement. Under the
settlement agreement, we agreed to terminate the litigation and
pay Abbott an aggregate of $22.5 million. This aggregate
amount included $20.5 million for a fully paid up license
to eliminate all of our future royalty obligations under the
license, and $2.0 million for a fully paid-up, royalty-free
license in additional fields under the licensed patents. The
paid-up license now
covers current and future products in the field of infectious
diseases and all other fields. Chiron reimbursed us
$5.5 million of the $20.5 million allocated to the
cost of the fully
paid-up license for the
current field, commensurate with its obligation to reimburse us
for a portion of the royalties due on the sale of blood
screening products. During the fourth quarter of 2004, we began
to amortize our share of the payment to cost of goods sold over
the patent’s remaining economic life of 135 months.
Non-Exclusive License with the Public Health Research
Institute of The City of New York, Inc. In June 1997, we
entered into a royalty bearing non-exclusive license with the
Public Health Research Institute of The City of New York, or
PHRI, to utilize PHRI’s fluorescently labeled NAT
technology. Under this agreement, we have worldwide rights to
develop, use and market kits in the field of human
in vitro diagnostics and food testing. We paid a
license fee and agreed to make milestone payments and annual
license fee payments, and to pay royalties on the net sales
price of products incorporating the licensed technology, subject
to a minimum annual royalty fee and a reduction in the royalties
based on the quantity of sales. From inception through
December 31, 2005, we incurred a total of $1.9 million
in license fees and $0.1 million in milestone payments
under this agreement. We anticipate that we will pay up to an
additional $0.4 million in milestone payments
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over the remaining term of the agreement. This agreement
terminates upon the expiration of the last of the patent rights
that are subject to this agreement, which is expected to occur
in April 2017. This agreement may be terminated by PHRI upon a
material breach of the agreement that is not cured following
30 days’ written notice, or by us for any reason
following 30 days’ written notice.
Exclusive License with DiagnoCure. In November 2003, we
entered into a license and collaboration agreement with
DiagnoCure under which we agreed to develop in collaboration
with DiagnoCure, and we agreed to market, a test to detect a new
gene marker for prostate cancer. The diagnostic test is expected
to detect a gene called PCA3 that has been shown by studies to
be over expressed in malignant prostate tissue. Under the terms
of the agreement, we paid DiagnoCure an upfront fee of
$3.0 million, and agreed to pay future fees and contract
development payments of up to $7.5 million over the three
years following execution of the contract. As of
December 31, 2005, approximately $2.0 million remained
to be paid to DiagnoCure pursuant to this obligation. We
received exclusive worldwide distribution rights under the
agreement to any products developed by the parties under the
agreement for the diagnosis of prostate cancer, and agreed to
pay DiagnoCure royalties on any such products of 8% on
cumulative net product sales of up to $50.0 million, and
royalties of 16% on cumulative net sales above
$50.0 million. The agreement provides that we may lose
exclusivity with respect to the licensed PCA3 marker if we fail
to diligently develop the collaborative diagnostic test. This
agreement expires, on a country-by-country basis, on the
expiration of our obligation to pay royalties to DiagnoCure,
which obligation remains in effect as long as the licensed
products are covered by a valid claim of the licensed patent
rights. We may terminate the agreement for any reason following
30 days’ written notice to DiagnoCure, or following
30 days’ written notice to DiagnoCure in the event a
licensed product fails to produce a certain level of results in
any clinical trial.
Exclusive Option Agreement with Qualigen, Inc. In
November 2004, we entered into an agreement with Qualigen, Inc.
under which we have an exclusive option to develop and
commercialize a NAT instrument designed for use at the point of
sample collection based on Qualigen’s FDA-approved FastPack
immunoassay system. If successfully developed, the portable
instrument would use our NAT technology to detect, at the point
of sample collection, the presence of harmful microorganisms,
genetic mutations and other markers of diseases. Under the terms
of the agreement, we paid Qualigen $1.0 million for an
18-month option to
license, on an exclusive worldwide basis, Qualigen’s
technology to develop NAT assays for the clinical diagnostics,
blood screening and industrial fields. During this period, we
are evaluating the feasibility of adapting Qualigen’s
immunoassay platform to perform NAT using our proprietary
technologies. If we exercise this option, we will purchase
shares of Qualigen preferred stock convertible into
approximately 19.5% of Qualigen’s then outstanding fully
diluted common shares. The cost of acquiring this equity
interest would be approximately $7.0 million. In addition,
we may pay Qualigen up to $3.0 million in license fees
based on development milestones, as well as royalties on any
eventual product sales.
Exclusive License from AdnaGen AG. In December 2004, we
entered into a license agreement with AdnaGen AG to license from
AdnaGen cell capture technology for use in our molecular
diagnostic tests to detect prostate and other cancers. Under the
terms of the agreement, we recorded license fees of
$1.75 million ($0.75 million in 2006 and
$1.0 million in 2004). We also agreed to pay AdnaGen up to
three milestone payments totaling an additional
$2.25 million based on the occurrence of certain clinical,
regulatory and/or commercial events. Further, we agreed to pay
AdnaGen royalties on net sales of any products developed by us
using AdnaGen’s technology. Additionally, we were granted
options through June 30, 2006 to obtain exclusive licenses
to use AdnaGen’s technology in molecular diagnostic tests
for kidney, ovarian and cervical cancers. If we exercise any of
these options, we will pay AdnaGen $0.3 million for the
exclusive license to each additional cancer product, as well as
royalties on net sales of any of these additional cancer
products using AdnaGen’s technology. In addition, we retain
a three-year right of first negotiation to negotiate with
AdnaGen on exclusive rights to molecular diagnostic tests for
breast, colon and lung cancers in the event that AdnaGen
proposes to grant to any third party a license to AdnaGen
technology for use to detect any of these cancers. The agreement
will expire on the expiration of our obligation to pay royalties
to AdnaGen under the agreement, which obligation remains in
effect as long as the licensed products are covered by a valid
claim of the licensed technology. We may terminate the agreement
in our sole discretion upon 30 days prior written notice to
AdnaGen, provided we have made any outstanding payments required
under the agreement. Either
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party may terminate the agreement for cause by written notice to
the other party of an uncured material breach by the other party
or if the other party is unable to pay its debts or enters into
compulsory or voluntary liquidation.
License Agreement with Corixa Corporation. In January
2005, we entered into a license agreement with Corixa
Corporation pursuant to which we received the right to develop
molecular diagnostic tests for multiple potential genetic
markers in the areas of prostate, ovarian, cervical, kidney,
lung and colon cancer. Pursuant to the terms of the agreement,
we paid Corixa an initial access license fee of
$1.6 million, an additional $1.6 million in February
2006 and have agreed to pay an additional $1.6 million on
January 31, 2007, unless we terminate the agreement prior
to that date. Pursuant to the agreement, we also agreed to pay
Corixa milestone payments totaling an additional
$2.0 million on a product-by-product basis based on the
occurrence of certain, regulatory and/or commercial events. We
also agreed to pay Corixa additional milestone payments and
royalties on net sales of any products developed by us using
Corixa’s technology. The agreement will expire on the
expiration of our obligation to pay royalties to Corixa under
the agreement, which obligation remains in effect as long as the
licensed products are covered by a valid claim of the licensed
patent rights. We may terminate the agreement in our sole
discretion upon 30 days prior written notice to Corixa,
provided we have made any outstanding payments due under the
agreement. Either party may terminate the agreement for cause by
written notice to the other party of an uncured material breach
by the other party or if the other party is unable to pay its
debts or enters into compulsory or voluntary liquidation.
Patents and Proprietary Rights
To establish and protect our proprietary technologies and
products, we rely on a combination of patent, copyright,
trademark and trade secrets laws, as well as confidentiality
provisions in our contracts.
We have implemented a patent strategy designed to maximize our
intellectual property rights. We have obtained and are currently
pursuing patent coverage in the United States and those foreign
countries that are home to the majority of our anticipated
customer base. As of December 31, 2005, we owned more than
390 issued United States and foreign patents. In addition, our
patent portfolio includes pending patent applications in the
United States and corresponding international filings in major
industrial nations.
United States utility patents issued from applications filed
prior to June 8, 1995 have a term of the longer of
20 years from the earliest priority date or 17 years
from issue. United States utility patents issued from
applications filed on or after June 8, 1995 have a term of
20 years from the earlier of the application filing date or
earlier claimed priority date of a regular application. 111 of
our current United States utility patents issued from
applications filed prior to June 8, 1995. 90 of our United
States utility patents issued from applications filed on or
after June 8, 1995. We have three United States design
patents that issued from applications filed on or after
June 8, 1995 and have a term of 14 years from the date
of issue. Patents in most foreign countries have a term of
20 years from the date of filing of the patent application.
Because the time from filing to issuance of patent applications
is often several years, this process may result in a shortened
period of patent protection, which may adversely affect our
ability to exclude competitors from our markets. The last of our
currently issued patents will expire by July 6, 2023. Our
continued success will depend to a significant degree upon our
ability to develop proprietary products and technologies and to
obtain patent coverage for those products and technologies. We
intend to continue to file patent applications covering any
novel and newly developed products and technologies.
On January 9, 2004, our basic patents covering detection of
organisms using probes to ribosomal nucleic acid (the Kohne
patents) expired in countries outside North America. While we
have additional patents relating to ribosomal nucleic acid
detection that remain in effect outside North America, these
patents may not provide sufficiently broad protection to prevent
competitors from selling products based on ribosomal nucleic
acid detection in markets outside North America. In the United
States, the
last-to-expire of the
Kohne patents remains in effect until March 3, 2015.
We also rely in part on trade secret protection for our
intellectual property. We attempt to protect our trade secrets
by entering into confidentiality agreements with third parties,
employees and consultants. The source code for our proprietary
software is protected both as a trade secret and as copyrighted
work. Our
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employees also sign agreements requiring that they assign to us
their interests in inventions and original expressions and any
corresponding patents and copyrights arising from their work for
us. However, it is possible that these agreements may be
breached, invalidated or rendered unenforceable, and if so,
there may not be an adequate corrective remedy available.
Competition
The medical diagnostics and biotechnology industries are subject
to intense competition. Our competitors in the United States and
abroad are numerous and include, among others, diagnostic,
health care, pharmaceutical and biotechnology companies. Our
major competitors in the NAT market include
F. Hoffmann-La Roche Ltd. and its subsidiary Roche
Molecular Systems, Inc., or, collectively, Roche, Abbott
Laboratories, Becton Dickinson and Company, and bioMérieux
S.A. All of these companies are manufacturers of
laboratory-based tests and instruments for the NAT market, and
we believe that all of these companies are developing automated
systems similar to our TIGRIS instrument. We believe the primary
competitive factors in the NAT market are sensitivity,
specificity, ease of use, potential for automation, cost,
proprietary position, regulatory approvals and compliance and,
for clinical diagnostic tests, availability of appropriate
reimbursement.
Many of our competitors have substantially greater financial,
technical, research and other resources and larger, more
established marketing, sales, distribution and service
organizations than we do. Moreover, many of our competitors
offer broader product lines and have greater brand recognition
than we do, and offer price discounts as a competitive tactic.
In addition, our competitors, many of which have made
substantial investments in competing technologies, may limit or
interfere with our ability to make, use or sell our products
either in the United States or in international markets.
In the markets for clinical diagnostic products, a number of
competitors, including Roche, Abbott Laboratories, Becton
Dickinson and bioMérieux, compete with us for product
sales, primarily on the basis of technology, quality,
reputation, accuracy, ease of use, price, reliability, the
timing of new product introductions and product line offerings.
In markets outside of the United States, other factors,
including local distribution systems, complex regulatory
environments and differing medical philosophies and product
preferences, influence competition as well. In the areas of NAT
diagnostics for STDs, Roche and Becton Dickinson currently have
FDA-approved tests for chlamydia infections and gonorrhea
utilizing amplification technology. Although we believe that the
APTIMA Combo 2 test has commercial advantages over the competing
tests from Roche, Becton Dickinson and others, these competitors
and potential competitors may be able to develop technologies
that are as effective as, or more effective, or easier to
interpret or less expensive than, those offered by us, which
would render our products uncompetitive or obsolete.
In the market for blood screening products, our primary
competitor is Roche, which received FDA approval of its
PCR-based NAT tests for blood screening in December 2002. We
also compete with assays developed internally by blood
collection centers and laboratories based on PCR technology, an
HCV antigen assay marketed by Ortho Clinical Diagnostics, a
subsidiary of Johnson & Johnson, and immunoassay
products from Abbott Laboratories. In the future, our blood
screening products may compete with viral inactivation or
reduction technologies and blood substitutes.
Chiron, 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. Chiron has granted HIV and HCV licenses to
Roche in the blood screening and clinical diagnostics fields.
Chiron has granted HIV and HCV licenses in the clinical
diagnostics field to Bayer Healthcare LLC, which also has the
right to grant certain additional HIV and HCV sublicenses in the
field to third parties. Chiron has granted an HCV license to
Abbott and an HIV license to Organon Teknika (now
bioMérieux) in the clinical diagnostics field. To the
extent that Chiron grants additional licenses in blood screening
or Bayer 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.
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Government Regulation
Our clinical diagnostic products generally are classified in the
United States as “devices” and are regulated by the
FDA’s Center for Devices and Radiological Health. Our blood
screening products generally are classified in the United States
as “biologics” and are regulated by the FDA’s
Center for Biologics Evaluation and Research.
For us to market our clinical diagnostic product kits as medical
devices in the United States, we generally must first obtain
clearance from the FDA pursuant to Section 510(k) of the
Federal Food, Drug, and Cosmetic Act, or FFDCA. If we modify our
products that already have received FDA clearance, the FDA may
require us to submit a separate 510(k), a “special”
510(k) or a premarket approval application, or PMA, for the
modified product before we are permitted to market it in the
United States. In addition, if we develop products in the future
that are not considered to be substantially equivalent to a
legally marketed device, we will be required to obtain FDA
approval by submitting a PMA.
By regulation, the FDA is required to respond to a 510(k) within
90 days of submission of the application. As a practical
matter, final clearance often takes longer. The FDA may require
further information, including additional clinical data, to make
a determination regarding substantial equivalence. If the FDA
determines that the device, or its intended use, is not
“substantially equivalent,” the device sponsor must
then fulfill much more rigorous premarketing requirements or
re-submit a new 510(k) with additional data.
In October 2005, the FDA notified us that it considers our
TIGRIS instrument for blood screening “not substantially
equivalent” to our already cleared eSAS for screening
donated human blood with the Procleix Ultrio assay. The FDA made
this determination in response to our 510(k) application for the
TIGRIS instrument for blood screening. We anticipate submitting
a new 510(k) application for the TIGRIS instrument for use with
the Procleix Ultrio assay following clearance of the TIGRIS
instrument for use with the WNV assay. There can be no assurance
that the TIGRIS instrument will receive FDA clearance for use
with the WNV or Procleix Ultrio assays.
The PMA process is more demanding than the 510(k) premarket
notification process. A PMA application, which is intended to
demonstrate that the device is safe and effective, must be
supported by extensive data, including data from preclinical
studies, human clinical trials and existing research material,
and must contain a full description of the device and its
components, a full description of the methods, facilities and
controls used for manufacturing, and proposed labeling. The FDA
has 180 days to review a filed PMA application, although
the review of an application more often occurs over a
significantly longer period of time, up to several years. In
approving a PMA application or clearing a 510(k) application,
the FDA also may require some form of post-market surveillance,
whereby the manufacturer follows certain patient groups for a
number of years and makes periodic reports to the FDA on the
clinical status of those patients when necessary to protect the
public health or to provide additional safety and effectiveness
data for the device. Our diagnostic assays for HCV and
tuberculosis are examples of successful PMA applications.
When FDA approval of a clinical diagnostic device requires human
clinical trials, and if the device presents a “significant
risk” (as defined by the FDA) to human health, the device
sponsor is required to file an investigational device exemption,
or IDE, application with the FDA and obtain IDE approval prior
to commencing the human clinical trial. If the device is
considered a “non-significant” risk, IDE submission to
FDA is not required. Instead, only approval from the
Institutional Review Board overseeing the clinical trial is
required.
Clinical trials must be conducted in accordance with Good
Clinical Practice under protocols generally submitted to the
FDA. Our clinical department has comprehensive experience with
clinical trials of NAT products.
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After the FDA permits a device to enter commercial distribution,
numerous regulatory requirements apply. In addition to potential
product specific post-approval requirements, all devices are
subject to:
| • | the Quality System Regulation, which requires manufacturers to follow comprehensive design, testing, control, documentation and other quality assurance procedures during the manufacturing process, | |
| • | labeling regulations, | |
| • | the FDA’s general prohibition against promoting products for unapproved or “off-label” uses, and | |
| • | the Medical Device Reporting regulation, which requires that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to reoccur. |
Failure to comply with the applicable United States medical
device regulatory requirements could result in, among other
things, warning letters, fines, injunctions, civil penalties,
repairs, replacements, refunds, recalls or seizures of products,
total or partial suspension of production, the FDA’s
refusal to grant future premarket clearances or approvals,
withdrawals or suspensions of current product applications,
suspension of export certificates and criminal prosecution.
Our blood screening products also are subject to extensive pre-
and post-market regulation as biologics by the FDA, including
regulations that govern the testing, manufacturing, safety,
efficacy, labeling, storage, record keeping, advertising, and
promotion of the products under the FFDCA and the Public Health
Services Act, and by comparable agencies in most foreign
countries. The process required by the FDA before a biologic may
be marketed in the United States generally involves the
following:
| • | completion of preclinical laboratory testing, | |
| • | submission of an IND, which must become effective before biologic clinical trials may begin, and | |
| • | performance of adequate and well controlled human clinical trials to establish the safety and effectiveness of the proposed biologic’s intended use. |
The FDA requires approval of a BLA before a licensed biologic
may be legally marketed in the United States. Product approvals
may be withdrawn or suspended if compliance with regulatory
standards is not maintained or if problems occur following
initial marketing. With respect to patented products or
technologies, delays imposed by the governmental approval
process may materially reduce the period during which we will
have exclusive rights to exploit them.
The results of product development and human studies are
submitted to the FDA as part of each BLA. The BLA also must
contain extensive manufacturing information. The FDA may approve
or disapprove a BLA if applicable FDA regulatory criteria are
not satisfied or it may require additional clinical data. If
approved, the FDA may withdraw a product approval if compliance
with post-market regulatory standards is not maintained or if
problems occur after the product reaches the marketplace. In
addition, the FDA may require post-marketing studies to monitor
the effect of approved products, and may limit further marketing
of the product based on the results of these post-market
studies. The FDA has broad post-market regulatory and
enforcement powers.
Satisfaction of FDA pre-market approval requirements for
biologics can take several years and the actual time required
may vary substantially based upon the type, complexity and
novelty of the product or disease. In general, government
regulation may delay or prevent marketing of potential products
for a considerable period of time and impose costly procedures
upon our activities. Success in early stage clinical trials does
not assure success in later stage clinical trials. Data obtained
from clinical activities is not always conclusive and may be
susceptible to varying interpretations that could delay, limit
or prevent regulatory approval. Even if a product receives
regulatory approval, later discovery of previously unknown
problems with a product may result in restrictions on the
product or even complete withdrawal of the product from the
market.
Our clinical trial programs for blood screening products were
developed in conjunction with our primary end users, The
American Red Cross and America’s Blood Centers. Our BLA for
the Procleix HIV-1/ HCV
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assay was approved in February 2002. Clinical trials of the
Procleix Ultrio assay were completed in 2004 with submission of
a BLA in the third quarter of 2004. On October 26, 2005, we
received a “complete review letter” from the FDA
setting forth questions regarding our BLA for the Procleix
Ultrio assay. We anticipate submitting a BLA amendment for the
Procleix Ultrio assay for use on eSAS, responding to the
FDA’s questions, by the end of the first quarter of 2006.
We anticipate submitting a (post-approval) BLA supplement for
the Procleix Ultrio assay, for use on the TIGRIS instrument,
following approval of the BLA for the Procleix Ultrio assay on
eSAS. There can be no assurance that the Procleix Ultrio assay
will receive regulatory approval by the FDA or that the TIGRIS
instrument will receive FDA clearance for use with the Procleix
Ultrio assay.
On December 1, 2005, the FDA granted marketing approval for
our WNV assay on eSAS to screen donated human blood. The 510(k)
clearance of eSAS for use with the WNV assay was granted prior
to the assay’s approval. We intend to submit for 510(k)
clearance of the TIGRIS instrument for use with the WNV assay in
the first part of 2006. We plan to submit a (post-approval)
supplement to our WNV assay BLA, adding the TIGRIS instrument,
at approximately the same time.
With respect to post-market product advertising and promotion,
the FDA imposes a number of complex regulations on entities that
advertise and promote biologics, which include, among others,
standards and regulations for
direct-to-consumer
advertising, off-label promotion, industry sponsored scientific
and educational activities, and promotional activities involving
the Internet. The FDA has broad enforcement authority under the
FFDCA, and failure to abide by applicable FDA regulations can
result in penalties including the issuance of a warning letter
directing the entity to correct deviations from FDA standards, a
requirement that future advertising and promotional materials be
pre-cleared by the FDA, and state and federal civil and criminal
investigations and prosecutions.
We and our contract medical product manufacturers are subject to
periodic inspection by the FDA and other authorities where
applicable, and are required to comply with the applicable FDA
current Good Manufacturing Practice regulations. Good
Manufacturing Practice regulations include requirements relating
to quality control and quality assurance, as well as the
corresponding maintenance of records and documentation, and
provide for manufacturing facilities to be inspected by the FDA.
Manufacturers of biologics also must comply with the FDA’s
general biological product standards. These standards often
include lot release testing by the FDA.
Outside the United States, our ability to market our products is
contingent upon maintaining our International Standards
Organization (ISO) certification, and in some cases
receiving specific marketing authorization from the appropriate
foreign regulatory authorities. The requirements governing the
conduct of clinical trials, marketing authorization, pricing and
reimbursement vary widely from country to country. Our EU
foreign marketing authorizations cover all member states.
Foreign registration is an ongoing process as we register
additional products and/or product modifications.
We are also subject to various state and local laws and
regulations in the United States relating to laboratory
practices and the protection of the environment. In each of
these areas, as above, regulatory agencies have broad regulatory
and enforcement powers, including the ability to levy fines and
civil and criminal penalties, suspend or delay issuance of
approvals, seize or recall products, and withdraw approvals, any
one or more of which could have a material adverse effect upon
us. In addition, in the course of our business, we handle, store
and dispose of chemicals. The environmental laws and regulations
applicable to our operations include provisions that regulate
the discharge of materials in the environment. Usually these
environmental laws and regulations impose “strict
liability,” rendering a person liable without regard to
negligence or fault on the part of, or conditions caused by,
others. We have not been required to expend material amounts in
connection with our efforts to comply with environmental
requirements. Because the requirements imposed by these laws and
regulations frequently change, we are unable to predict the cost
of compliance with these requirements in the future, or the
effect of these laws on our capital expenditures, results of
operations or competitive positions.
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Manufacturing and Raw Materials
We have two
state-of-the-art
manufacturing facilities in the United States. Our Mira Mesa
manufacturing facility in San Diego, California is
dedicated to producing our clinical diagnostic products and
provides us with highly flexible and cost effective
manufacturing capabilities. In 1999, we completed our Rancho
Bernardo manufacturing facility in San Diego for the
manufacture of our blood screening products. This facility meets
the strict standards set by the FDA’s Center for Biologics
Evaluation and Research for the production of blood screening
products. We built this facility with the capability to expand
its operations to include production of additional assays for
the blood screening market and organ transplant testing market.
We believe this facility has the capacity to produce sufficient
tests to satisfy current demand for these blood screening
assays. We also have manufacturing capability at MLT’s
facility in Cardiff, United Kingdom and expect that some space
at the 291,000 square-foot building we are constructing
adjacent to our San Diego headquarters will be utilized for
manufacturing. We believe that our existing manufacturing
facilities provide us with capacity to meet the needs of our
currently anticipated growth.
We store our finished products at our warehouses in our
manufacturing facilities. Some of our products must be stored in
industrial refrigeration or freezer units which are on site. We
ship our products under ambient, refrigerated or frozen
conditions, as necessary, through third-party service providers.
We rely on one contract manufacturer for the production of each
of our instrument product lines. For example, KMC Systems is the
only manufacturer of our TIGRIS instrument, and MGM Instruments
is the only manufacturer of our LEADER series of luminometers.
We have no firm long-term commitments from KMC Systems, MGM
Instruments or any of our other manufacturers to supply products
to us for any specific period, or in any specific quantity,
except as may be provided in a particular purchase order.
We use a diverse and broad range of raw materials in the design,
development and manufacture of our products. Although we produce
some of our materials on site at our manufacturing facilities,
we purchase most of the materials and components used to
manufacture our products from external suppliers. In addition,
we purchase many key raw materials from single source suppliers.
For example, our current supplier of key raw materials for our
amplified NAT assays, pursuant to a fixed-price contract, is the
Roche Molecular Biochemicals Division of Roche Diagnostics GmbH,
an affiliate of Roche Molecular Diagnostics, which is one of our
primary competitors. In addition, we have entered into a supply
agreement with F. Hoffmann-La Roche Ltd. and its affiliate
Roche Molecular Systems, Inc. for the manufacture and supply of
DNA probes for HPV. We work closely with our suppliers to assure
continuity of supply while maintaining high quality and
reliability. Although we generally consider and identify
alternative suppliers, we do not typically pursue alternative
sources due to the strength of our existing supplier
relationships.
Quality Systems
We have implemented modern quality systems and concepts
throughout our organization. Our regulatory, quality and
government affairs department supervises our quality systems and
is responsible for assuring compliance with all applicable
regulations, standards and internal policies. Our senior
management team is actively involved in setting quality
policies, managing internal regulatory matters and monitoring
external quality performance.
Our regulatory, quality and government affairs department has
successfully led us through multiple quality and compliance
audits by the FDA, foreign governments and customers. This
department also coordinated an audit by TÜV Rheinland of
North America, leading to our European Standard, EN 13485,
certification. TÜV Rheinland of North America also
certifies our Diagnostic “CE” marking activities.
Research and Development
As of December 31, 2005, we had 256 full-time and
temporary employees in research and development. Our research
and development expenses were $71.8 million in 2005,
$68.5 million in 2004 and $63.6 million in 2003.
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Employees
As of December 31, 2005, we had 866 full-time
employees, of whom 186 hold advanced degrees, 230 were in
research and development, 119 were in regulatory, clinical and
quality systems, 157 were in sales and marketing, 134 were in
general and administrative and 226 were in operations. None of
our employees is covered by a collective bargaining agreement,
and we consider our relationship with our employees to be good.
In addition, as of December 31, 2005, we had 84 temporary
employees.
| Item 1A. | Risk Factors |
| 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
research and development costs we incur in connection with
manufacturing developmental lots and clinical trial lots. We
incurred substantial costs of manufacturing these lots in 2005
and expect to incur substantial costs for these lots in the
future. Moreover, a variety of factors may affect our ability to
make accurate forecasts regarding our operating results. For
example, our blood screening products and some of our clinical
diagnostic products, such as APTIMA Combo 2, have a
relatively limited sales history, which limits our ability to
project future sales and the sales cycle accurately. In
addition, we base our internal projections of our blood
screening product sales and international sales of diagnostic
products on projections prepared by our distributors of these
products and therefore we are dependent upon the accuracy of
those projections. 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.
| We are dependent on Chiron 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 Chiron to distribute our blood screening products and
Bayer to distribute some of our viral clinical diagnostic
products. Commercial product sales by Chiron accounted for 42%
of our total revenues for 2005 and 35% of our total revenues for
2004. Our agreement with Chiron will terminate in 2010 unless
extended by the 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 in connection with our blood screening collaboration. The
arbitration was resolved by mutual agreement in December 2001.
In the event that we or Chiron commence arbitration against each
other in the future under the collaboration agreement,
proceedings could delay or decrease our receipt of revenue from
Chiron or otherwise disrupt our collaboration with Chiron, which
could cause our revenues to decrease and our stock price to
decline.
On October 30, 2005, Chiron announced that it entered into
a merger agreement with Novartis AG. In the event the merger is
consummated, Chiron will become a wholly-owned subsidiary of
Novartis. We do not know whether the merger will be consummated
or, if consummated, what effect, if any, it will have on our
relationship with Chiron.
Our agreement with Bayer for the distribution of our products
will terminate in 2010. In November 2002, we initiated an
arbitration proceeding against Bayer in connection with our
clinical diagnostic collaboration.
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Under the terms of the collaboration agreement, Bayer acquired
the exclusive right to distribute nucleic acid diagnostic tests
designed and developed by us for the detection of HIV, hepatitis
virus and other specified viruses, subject to specific
conditions. Our demand for arbitration stated that Bayer has
failed to fulfill the conditions required to maintain exclusive
distribution rights. In June 2005, the arbitrator issued an
Interim Opinion and Award and determined, among other things,
that we are entitled to a co-exclusive right to distribute
qualitative TMA assays to detect HCV and HIV-1 for the remaining
term of the agreement. Bayer previously held the exclusive
rights to market these products. We will be required to pay
running sales royalties to Bayer on sales of the TMA assays for
HCV and HIV-1, at rates
we believe are generally consistent with rates paid by other
licensees of the relevant patents. The arbitrator also
determined that the collaboration agreement should be
prospectively terminated, as we requested. As a result of a
termination of the agreement, we will have the right to develop
and market future viral assays that had been previously reserved
for Bayer. Bayer will retain co-exclusive rights to distribute
two products that it currently markets. The arbitrator’s
final decision in this matter is subject to a right to appeal to
an arbitration appeal panel within JAMS. There can be no
assurances as to the final outcome of the arbitration. We are
also involved in patent litigation with Bayer.
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.
Our distribution agreement with bioMérieux terminates on
May 1, 2006, although it may terminate earlier under
certain circumstances. The distribution rights revert back to us
upon termination. Our distribution agreement with Rebio Gen
terminates on March 31, 2006. We have commenced discussions
with Rebio Gen regarding renewing the distribution agreement.
However, we may not be able to renew the agreement on favorable
terms, or at all.
If any of our distribution or marketing agreements is
terminated, particularly our agreement with Chiron, 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
market successfully 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 Chiron 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 the joint development and marketing of our products. In
addition, we expect to rely on our corporate collaborators for
the commercialization of some of our 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 pre-clinical
or clinical 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.
The continuation of any of our collaboration agreements depends
on their periodic renewal by us and our collaborators. For
example, our agreement with Chiron will terminate in 2010 unless
extended by the development of new products under the agreement,
in which case it will expire upon the later of the original term
or five years after the first commercial sale of the last new
product developed during the original term. Subject to the final
outcome of our arbitration with Bayer, the remaining provisions
of our Bayer collaboration agreement will terminate in 2010.
Both collaboration agreements are also subject to termination
prior to expiration upon a material breach by either party to
the agreement.
If any of our 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
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collaborations may not be successful. In addition, in the event
of a dispute under our current or any future collaboration
agreements, such as those under our agreements with Chiron and
Bayer, 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 initial introduction. We believe that our
experience with the TIGRIS instrument is consistent with the
general experience for comparable diagnostic instruments. We
have initiated an in-service reliability improvement program for
our TIGRIS instrument and a number of improvements have been
installed at customers’ sites. If the continuous
improvement program does not result in improved instrument
reliability, we could incur greater than anticipated service
expenses and market acceptance of the instrument could be
adversely affected. We have also committed significant resources
to our reliability improvement program. Our Vice President,
Product Development is leading this effort as her primary
assignment. However, these additional resources may not result
in the desired improvements in the reliability of our TIGRIS
instrument. Additionally, failure to resolve reliability issues
as they develop could materially damage our reputation and
prevent us from retaining our existing customers and attracting
new customers.
| 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. 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. For
example, in October 2005, the FDA notified us that it considers
our TIGRIS instrument for blood screening “not
substantially equivalent” to our already cleared eSAS for
screening donated human blood with the Procleix Ultrio assay.
The FDA made this determination in response to our 510(k)
application for the TIGRIS instrument for blood screening. Also
in October 2005, we received a “complete review
letter” from the FDA setting forth questions regarding our
BLA for the Procleix Ultrio assay itself. There can be no
assurance that the Procleix Ultrio assay will receive regulatory
approval by the FDA or that the TIGRIS instrument will receive
FDA clearance for use with the WNV or Procleix Ultrio assays.
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.
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.
Outside the United States, our ability to market our products is
contingent upon maintaining our International Standards
Organization (ISO) certification, and in some cases
receiving specific marketing authorization from the appropriate
foreign regulatory authorities. The requirements governing the
conduct of
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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.
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. Our
products and operations also are often subject to the rules of
industrial standards bodies, such as the International Standards
Organization. Complying with these rules and regulations could
cause us to incur significant additional expenses, which would
harm our operating results.
The use of our diagnostic products is also affected by the
Clinical Laboratory Improvement Amendments of 1988, or CLIA, and
related federal and state regulations which 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 any or all of our
diagnostic products.
| 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
laboratories, public health laboratories and hospitals. 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 Laboratories, Becton
Dickinson and bioMérieux, compete with us for product
sales, primarily on the basis of technology, quality,
reputation, accuracy, ease of use, price, reliability, the
timing of new product introductions and product line offerings.
In markets outside of the United States, other factors,
including local distribution systems, complex regulatory
environments and differing medical philosophies and product
preferences influence competition as well. 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 us.
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. In
addition, we have licensed some of our proprietary technology
relating to certain clinical diagnostic and food pathogen
applications for use on specific instruments to bioMérieux,
and we may license other technologies to potential competitors
in the future. As a result, we may in the future compete with
bioMérieux and these other licensees for sales of products
incorporating our technology. Our competitors may be in better
position to respond quickly to new or emerging technologies, may
be able to undertake more extensive marketing campaigns, may
adopt more aggressive pricing policies and may be more
successful in attracting potential customers, employees and
strategic partners than we are. Some of our competitors have
developed “real time” or kinetic nucleic acid assays
and semi-automated instrument systems for those assays. Our
competitors may be 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
Laboratories with respect to immunoassay products. In the
future, our blood screening products also may compete with viral
inactivation or reduction technologies and blood substitutes.
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Chiron, 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. Chiron has granted HIV and HCV licenses to
Roche Molecular Systems in the blood screening and clinical
diagnostics fields. Chiron has granted HIV and HCV licenses in
the clinical diagnostics field to Bayer Healthcare LLC, which
also has the right to grant certain additional HIV and HCV
sublicenses in the field to third parties. Chiron has granted an
HCV license to Abbott and an HIV license to Organon Teknika (now
bioMérieux) in the clinical diagnostics field. To the
extent that Chiron grants additional licenses in blood screening
or Bayer 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.
| Our gross profit margin percentage on the sale of blood screening assays may decrease upon the implementation of individual donor testing. |
We currently receive revenues from the sale of our blood
screening assays for use with pooled donor samples. In pooled
testing, multiple donor samples are initially screened by a
single test. However, Chiron sells our blood screening assays to
blood collection centers on a per donation basis. We expect the
blood screening market ultimately to transition from pooled
testing to individual donor testing. A greater number of tests
will be required for individual donor testing than are now
required for pooled testing. Under our collaboration agreement
with Chiron, we bear the cost of manufacturing our blood
screening assays. The greater number of tests required for
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 the
blood screening assay may decrease upon the adoption of
individual donor testing. We are not able to predict accurately
the extent to which our gross profit margin percentage may be
negatively affected as a result of individual donor testing,
because we do not know the ultimate selling price that Chiron
would charge to the end user if individual donor testing were
implemented.
| 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 Chiron. Our blood screening
collaboration with Chiron accounted for 52% of our total
revenues for 2005, compared to 47% for 2004. Our blood screening
collaboration with Chiron 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. Chiron was our only
customer that accounted for greater than 10% of our total
revenues for 2005. In addition, Quest Diagnostics Incorporated,
Laboratory Corporation of America Holdings and various state and
city public health agencies accounted for an aggregate of 20% of
our total revenues in each of 2005 and 2004. 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
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 had more than 390 United States and
foreign patents covering our products and technologies as of
December 31, 2005, 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,
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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
July 6, 2023, 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. Bayer recently initiated patent
litigation against us alleging that we are developing real-time
diagnostic assays for HIV and HCV that are covered by certain
patents without the authorization of the patent owner.
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 strategic
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, competitors may develop 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, are currently facing, 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.
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Recently, we have been involved in a number of patent disputes
with third parties, including Bayer, some of which remain
unresolved. Additionally, we hold certain rights in the blood
screening and clinical diagnostics fields under Chiron patents
covering the detection of HIV. In February 2005, the
U.S. Patent and Trademark Office declared two interferences
related to Chiron’s U.S. Patent No. 6,531,276
(“Methods For Detecting Human Immunodeficiency Virus
Nucleic Acid”) (the “‘276 patent”). The
first interference is between Chiron and Centocor, Inc., and
pertains to Centocor’s U.S. Patent Application No.
06/693,866 (“Cloning and Expression of HTLV-III DNA”)
(the “‘866 application”). The second interference
is between Chiron 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)”) (the
“‘410 application”). Chiron is the junior party
in both interferences. In February 2005, at about the time the
interferences were declared, we received a letter from the
Institut Pasteur regarding alleged infringement of Institut
Pasteur’s European Patent EP 0 178 978 (“Cloned DNA
sequences, hybridizable with genomic RNA of
lymphadenopathy-associated virus, or LAV) (“‘978
patent”), by the HIV-1 nucleic acid screening assays
performed on our Procleix system that is marketed and
distributed by Chiron. There can be no assurances as to the
ultimate outcomes of these matters.
| We may be subject to future product liability claims that may exceed the scope and amount of our insurance coverage, which would expose us to liability for uninsured claims. |
While there is a federal preemption defense against product
liability claims for medical products that receive premarket
approval from the FDA, we believe that no such defense is
available for our products that we market under a 510(k)
clearance. As such, we are subject to potential product
liability claims as a result of the design, development,
manufacture and marketing of our clinical diagnostic products.
Any product liability claim brought against us, with or without
merit, could result in the increase of our product liability
insurance rates. In addition, our insurance policies have
various exclusions, and thus we may be subject to a product
liability claim for which we have no insurance coverage, in
which case, we may have to pay the entire amount of any award.
In addition, insurance varies in cost and can be difficult to
obtain, and we may not be able to obtain insurance in the future
on terms acceptable to us, or at all. A successful product
liability claim brought against us in excess of our insurance
coverage may require us to pay substantial amounts, which could
harm our business and results of operations.
| We are exposed to risks associated with acquisitions and other long-lived and intangible assets that may become impaired and result in an impairment charge. |
As of December 31, 2005, we had approximately
$194.4 million of long-lived assets, including
$21.0 million of capitalized software relating to our
TIGRIS instrument, goodwill of $18.6 million, a
$2.5 million investment in Molecular Profiling Institute,
Inc., and $47.1 million of capitalized license and
manufacturing fees, patents and purchased intangibles.
Additionally, we had $32.3 million of land and building,
$4.3 million of leasehold improvements, $35.5 million
of construction in-progress and $33.1 million of equipment
and furniture and fixtures. 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 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.
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| 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, including with our industrial collaborators. We
believe that we will need to continue to provide new products
that can detect 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, such as our
TIGRIS instrument.
The development of new or enhanced products is a complex and
uncertain process requiring the accurate anticipation of
technological and market 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. For example, we recently
announced delays in FDA clearance for our TIGRIS instrument for
blood screening with the Procleix Ultrio assay and regarding our
BLA for the Procleix Ultrio assay itself. Regulatory clearance
or approval of these and any other new products 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.
| We recently entered into 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. |
In July and August 2005 we entered into 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. Our experience to date has been primarily focused on
developing products for the clinical diagnostic and blood
screening markets. We have limited experience applying our
technologies and operating in these new industrial testing
markets. The process of successfully developing products for
application in these potential 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 even if
no new products are successfully developed. We will need to 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 new
markets. 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 from traditional culture and other testing methods to
tests using our NAT technologies, which we expect will be more
expensive than existing methods. We will be reliant on our
collaborators and their experience and expertise in addressing
customer needs and other requirements 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, there is no
guarantee that we will be able to successfully develop
commercially viable products for application in industrial
testing or any other new markets.
| 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 continue to expand our product
offerings and continue to develop products and technologies in
collaboration with our strategic partners. As a result, we will
need to continue to generate significant revenues to maintain
profitability. Although we expect our
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research and development expenses as a percentage of revenue to
decrease in future periods, we may not be able to generate
revenues and may not 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 strategic acquisitions or investments.
We may need to raise substantial amounts of money to fund a
variety of future activities integral to the development of our
business, including:
| • | for research and development to successfully develop new technologies and products, | |
| • | to conduct clinical trials, | |
| • | to obtain regulatory approval for new products, | |
| • | to file and prosecute patent applications and defend and assert patents to protect our technologies, including through costly litigation, | |
| • | to manufacture additional products ourselves or through third parties, | |
| • | to market different products to different markets, either through building our own sales and distribution capabilities or relying on third parties, and | |
| • | to acquire new technologies, products or companies. |
If we raise funds through the issuance of debt or equity,
including through the issuance of debt or equity securities
pursuant to our
Form S-3 shelf
registration statement that we filed on August 29, 2003
with the SEC relating to the possible future sale of up to an
aggregate of $150 million of debt or equity securities, 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 effect 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.
| We have only one third-party manufacturer for each of our instrument product lines, which exposes us to increased risks associated with 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
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 product shipments to our customers could be delayed, which
would decrease our revenues and harm our competitive position
and reputation.
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Further, our business would be harmed if we fail to manage
effectively the manufacturing of our products. Because we place
orders with our manufacturers based on our forecasts of expected
demand for our products, 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,
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.
| If we or our contract manufacturers are unable to manufacture our products in sufficient quantities, on a timely basis, at acceptable cost 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
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. For example, we anticipate that we will need to
develop closed unit assay pouches containing both liquid
reagents and dried pellets to be used in industrial
applications, which will be a new process for us. 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
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 and clinical and validation testing on these
product candidates, which will prevent or delay regulatory
clearance or approval of these product candidates and the
initiation of new development programs.
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 tests 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
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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 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. A government-mandated recall, or a
voluntary recall by us, could divert managerial and financial
resources and potentially harm our reputation with customers. In
the past, we have had four voluntary recalls, which, in each
case, required us to identify and correct the problem. For
example, we experienced a recall in June 2004 as a result of a
customer complaint about our Mycobacterium Tuberculosis product
suggesting reduced stability of one of our reagents. The problem
was identified and corrected and customers were provided with
replacement reagent. Our products may be subject to additional
recalls in the future. Future recalls could be more difficult
and costly to correct, may result in the suspension of sales of
our products, and may harm our financial results and our
reputation.
| Our sales to international markets are subject to additional risks. |
Sales of our products outside the United States accounted for
21% of our total revenues for 2005 and 15% of our total revenues
for 2004. Sales by Chiron of our blood screening products
outside of the United States accounted for 78% of our
international revenues for 2005 and 58% of our international
revenues for 2004. Chiron has responsibility for the
international distribution of our blood screening products,
which includes sales in France, Australia, Singapore, New
Zealand, South Africa, Italy and other countries. Our sales in
France and Japan that were not made through Chiron each
accounted for 5% of our international sales for 2005 and 10% and
6%, respectively, for 2004.
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. Other than Canada, our sales
are currently denominated in United States dollars. 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:
| • | the imposition of government controls, | |
| • | export license requirements, | |
| • | economic and political instability, | |
| • | price controls, | |
| • | trade restrictions and tariffs, | |
| • | differing local product preferences and product requirements, and | |
| • | changes in foreign medical reimbursement and coverage policies and programs. |
We also may have difficulty introducing new products in
international markets. For example, we do not believe our blood
screening products will be widely adopted in Germany until we
are able to offer an assay that screens for HBV, HAV, and parvo
B19, as well as HIV-1 and HCV, or in Japan until we are able to
offer an assay that meets particular Japanese requirements for
screening for HBV, HIV-1 and HCV. Whenever we seek to enter a
new international market, we will be dependent on the marketing
and sales efforts of our international distributors.
In addition, we anticipate that requirements for smaller pool
sizes or ultimately individual donor testing of blood samples,
if and when implemented, could result in lower gross margin
rates, as additional tests would be required to deliver the
sample results, unless a corresponding increase in sales pricing
structure is implemented. In general, international pool sizes
are smaller than domestic pool sizes and, therefore, growth in
blood screening revenues attributed to international expansion
may lead to lower gross margin rates.
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| 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 laboratories 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
domestic and international 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
laboratories 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, laboratories and
hospitals 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.
| Disruptions in the supply of raw materials and consumable goods from our single source suppliers, including the Roche Molecular Biochemicals division of Roche Diagnostics GmbH, 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. For example, our current
supplier of certain key raw materials for our amplified NAT
assays, pursuant to a fixed-price contract, is Roche Molecular
Biochemicals, and we have a supply agreement for nucleic acids
for human papillomavirus with Roche Molecular Systems, each of
which are affiliates of Roche Diagnostics GmbH, one of our
primary competitors. 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 in a raw material, either unknown to us or
incompatible with our products, could significantly reduce 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 future products and limit our growth.
| We are dependent on technologies we license, and if we fail to 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 and the
chemiluminescence technology we use in our products is based on
technology licensed by our consolidated subsidiary, Molecular
Light Technology Limited, from the University of Wales College
of Medicine. 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. If our license with respect to any of these
technologies is terminated for any reason, we will not be able
to sell
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products that incorporate the technology. Third parties that
license technologies to us also may be acquired by our
competitors or may otherwise attempt to terminate or restrict
our licenses for their commercial benefit. In addition, 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 third parties who
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.
| 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, particularly Henry
L. Nordhoff, our Chairman, President and Chief Executive
Officer, or our inability to identify, attract, retain and
integrate additional qualified management personnel, could make
it difficult for us to manage our business successfully, attract
new customers, retain existing customers and pursue our
strategic objectives. Although we have employment agreements
with our executive officers, we may be unable to retain our
existing management. We do not maintain key person life
insurance for any of our executive officers.
Competition for skilled sales, marketing, research, product
development, engineering, and technical personnel is intense and
we may not be able to recruit and retain the personnel we need.
The loss of the services of any key sales, marketing, research,
product development, engineering, or technical 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 and forming collaborations, strategic
alliances and joint ventures. Any future acquisitions by us also
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.
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 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 products in our two manufacturing facilities
located in San Diego, California. These facilities and the
manufacturing equipment we use to produce our products 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
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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. 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, provisions of Delaware law and our rights plan 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
stockholders may consider favorable or may impede the ability of
the holders of our common stock to change our management. The
provisions of our amended and restated certificate of
incorporation and amended and restated bylaws, among other
things:
| • | divide our board of directors into three classes, with members of each class to be elected for staggered three-year terms, | |
| • | limit the right of stockholders to remove directors, | |
| • | regulate how stockholders may present proposals or nominate directors for election at annual meetings of stockholders, and | |
| • | authorize our board of directors to issue preferred stock in one or more series, without stockholder approval. |
In addition, because we have not chosen to be exempt from
Section 203 of the Delaware General Corporation Law, this
provision could also delay or prevent a change of control that
our stockholders may favor. Section 203 provides that,
subject to limited exceptions, persons that acquire, or are
affiliated with a person that acquires, more than
15 percent of the outstanding voting stock of a Delaware
corporation shall not engage in any business combination with
that corporation, including by merger, consolidation or
acquisitions of additional shares, for a three-year period
following the date on which that person or its affiliate crosses
the 15 percent stock ownership threshold.
We also adopted a rights plan that could discourage, delay or
prevent an acquisition of us under certain circumstances. The
rights plan provides for preferred stock purchase rights
attached to each share of our common stock, which will cause
substantial dilution to a person or group acquiring 15% or more
of our stock if the acquisition is not approved by our Board of
Directors.
| We may not successfully integrate acquired businesses or technologies. |
Through a series of transactions concluding in May 2005, we
acquired all of the outstanding shares of Molecular Light
Technology Limited and its subsidiaries and, in the future, we
may acquire additional businesses or technologies. Managing this
acquisition and any future acquisitions will entail numerous
operational and financial risks, including:
| • | the inability to retain or replace key employees of any acquired businesses or hire enough qualified personnel to staff any new or expanded operations; |
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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; | |
| • | the exposure to federal, state, local and foreign tax liabilities in connection with any acquisition or the integration of any acquired businesses; | |
| • | the exposure to unknown liabilities; | |
| • | higher than expected acquisition and integration costs that could cause our quarterly and annual operating results to fluctuate; | |
| • | increased amortization expenses if an acquisition results in significant goodwill or other intangible assets; | |
| • | combining the operations and personnel of acquired businesses with our own, which could be difficult and costly; and | |
| • | integrating or completing the development and application of any acquired technologies, which could disrupt our business and divert our management’s time and attention. |
| 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.
| 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. For example, in December 2004, the FASB
issued SFAS No. 123(R), “Share-Based
Payment,” which is a revision of SFAS No. 123,
“Accounting for Stock-Based Compensation.” In April
2005, the SEC approved a vote that effectively required us to
adopt this statement on January 1, 2006. This
statement eliminates the ability to account for stock-based
compensation using the intrinsic value method allowed under
APB 25 and requires these transactions to be recognized as
compensation expense in the statement of income based on the
fair values on the date of grant, with the compensation expense
recognized over the period in which an employee or director is
required to provide service in exchange for the stock award.
This new requirement will negatively impact our earnings. For
example, recording a charge for employee stock options under
SFAS No. 123, “Accounting for Stock-Based
Compensation,” would have reduced our net income by
approximately $15.3 million and $13.3 million for 2005
and 2004, respectively.
| 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 have recently implemented a new ERP
software system to replace our various legacy systems. As a part
of this effort, we are transitioning data and changing processes
that may be more expensive, time consuming and resource
intensive than planned. Any disruptions that may occur in the
continued implementation of this new system or any future
systems could increase our expenses and adversely affect our
ability to report in an
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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 estimated earnings per
share are based in part upon a forecast of our weighted average
shares outstanding at the time of our estimate. 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 adverse
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 Stock 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 all reasonably necessary
resources to comply with evolving standards. These investments
have resulted in increased general and administrative expenses
and a diversion of management time and attention from
revenue-generating activities and may continue to do so in the
future.
| Item 1B. | Unresolved Staff Comments |
None.
| Item 2. | Properties |
Our worldwide headquarters are located in our
262,000 square-foot Genetic Center Drive, or GCD, facility
located in San Diego, California. We own the GCD facility,
the land on which it sits and an adjacent
22-acre parcel. We are
building a 291,000 square-foot building on the adjacent
22-acre parcel to
support our company-wide growth. This building will be used
primarily for research and development, office space,
warehousing of finished goods and distribution. Approximately
100,000 square feet of the new building will initially be
left vacant and used for future expansion. We anticipate that
construction of the additional building will be complete in mid
2006 and the first phase will cost approximately
$44.4 million, of which $32.1 million was capitalized
to construction in-progress as of December 31, 2005. MLT
owns a 23,000 square-foot facility in Cardiff, United
Kingdom.
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We also lease the following additional facilities:
Leased Facilities
| Location | Size | Term of Lease | |||||
|
Rancho Bernardo Facility
San Diego, California |
93,646 square feet | Lease expires in February 2008 with three five-year renewal options | |||||
|
Mira Mesa Facility
San Diego, California |
29,133 square feet | Lease expires in June 2006 with no renewal options | |||||
|
Wateridge Facility
San Diego, California |
29,141 square feet | Lease expires in October 2006 with no renewal options | |||||
|
Rehco Facility
San Diego, California |
20,686 square feet | Lease expires in June 2006 for Suite B, August 2006 for Suite C and August 2009 for Suite D, in each case with no renewal options. | |||||
We expect to vacate the Mira Mesa and Wateridge facilities, as
well as portions of the Rehco facility, following completion of
the new building described above.
| Item 3. | Legal Proceedings |
We are a party to the following litigation and are currently
participating in other litigation in the ordinary course of
business. We intend to vigorously defend our interests in these
matters. We expect that the resolution of these matters will not
have a material adverse effect on our business, financial
condition or results of operations. However, due to the
uncertainties inherent in litigation, no assurance can be given
as to the outcome of these proceedings. If any of these matters
were resolved in a manner unfavorable to us, our business,
financial condition and results of operations would be harmed.
| Enzo Biochem, Inc. |
In June 1999, the Company was sued by Enzo Biochem, Inc. in the
United States District Court for the Southern District of New
York. Enzo alleged that the Company and other defendants have
willfully infringed United States patent no. 4,900,659, or the
“‘659 patent,” through the manufacture and sale
of products for the diagnosis of gonorrhea. On July 27,
2004, the District Court granted summary judgment in favor of
the Company and other defendants, and against Enzo, holding that
the ‘659 patent is invalid based on the on-sale doctrine.
On September 30, 2005, the United States Court of Appeals
for the Federal Circuit affirmed the judgment in the
Company’s favor. Enzo did not file for rehearing with the
Federal Circuit or petition the U.S. Supreme Court for a
writ of certiorari within the time allowed. The Company believes
that this matter is now concluded.
| Bayer Corporation |
In November 2002, the Company filed a demand for arbitration
against Bayer Corporation, or Bayer, in the Judicial
Arbitration & Mediation Services, Inc., or JAMS, office
in San Diego, California related to the Company’s
collaboration with Bayer for nucleic acid diagnostic tests for
viral organisms. Under the terms of the June 1998 collaboration
agreement, Bayer acquired the exclusive right to distribute
nucleic acid diagnostic tests designed and developed by
Gen-Probe for the detection of human immunodeficiency virus
(“HIV”), hepatitis viruses and other specified
viruses, subject to certain conditions. Gen-Probe’s demand
for arbitration stated that Bayer failed to fulfill the
conditions required to maintain exclusive distribution rights.
The arbitration demand sought confirmation that the agreement
grants Gen-Probe, in the present circumstances, a co-exclusive
right to directly distribute the viral diagnostic tests that are
the subject of the agreement. In November 2003, Bayer filed a
counterclaim for money damages based on alleged delays in the
development of the TIGRIS instrument, alleged delays in the
development of certain assays, and other claims. Bayer
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Healthcare LLC was also added as a respondent and
counterclaimant. The hearing on the matter began on
September 13, 2004 and closing arguments were completed on
November 3, 2004.
On April 5, 2005, the arbitrator issued a Tentative Opinion
and Award, and requested comments be submitted from the parties
related to implementation of the decision. After considering and
incorporating some of the parties’ suggestions, on
June 24, 2005, the arbitrator issued an Interim Opinion and
Award. The Interim Opinion and Award adopted all substantive
rulings of the Tentative Opinion and Award. The arbitrator
determined that the Company is entitled to a co-exclusive right
to distribute qualitative Transcription-Mediated Amplification
(“TMA”) assays to detect the hepatitis C virus
(“HCV”) and HIV-1 for the remaining term of the
agreement. Bayer previously held the exclusive rights to market
these products. The arbitrator also determined that the
collaboration agreement should be prospectively terminated, as
the Company requested. As a result of a termination of the
agreement, the Company will have the right to develop and market
future viral assays that had been previously reserved for Bayer.
Bayer will retain co-exclusive rights to distribute two products
that it currently markets. Bayer also will be required to
reimburse the Company $2.0 million for the Company’s
legal fees and expenses related to the arbitration proceedings.
As discussed in Note 3 — Summary of significant
accounting policies (Contingencies), the Company will not record
any award for reimbursement of legal fees and expenses until the
arbitration has been finalized and the cash has been received.
The arbitrator rejected Bayer’s multimillion-dollar
counterclaim for damages. In the June 2005 Interim Opinion and
Award, the arbitrator also concluded that an additional hearing
would be required to determine whether a royalty payment would
be required as a result of the Company exercising its
co-exclusive rights to distribute the qualitative TMA assays for
HCV and HIV-1, and, if
so, the amount and beneficiary of such royalties. The additional
hearing took place on September 14 and 15, 2005. On
March 3, 2006, the arbitrator issued his Tentative Award
following the additional hearing. The arbitrator concluded that
Gen-Probe is licensed under the relevant HIV and HCV patents for
qualitative assays during the term of the collaboration
agreement and that the Company is not obligated to pay Bayer an
initial license fee in connection with the sale of those assays.
The arbitrator further concluded that the Company will be
required to pay running sales royalties to Bayer on the
Company’s sales of the qualitative TMA assays for HCV and
HIV-1. We believe the royalty rates are generally consistent
with rates paid by other licensees of the relevant patents. The
March 3, 2006 Tentative Award is subject to revision by the
arbitrator following comments by the parties.
The arbitrator’s final decision in this matter is subject
to a right to appeal to an arbitration appeal panel within JAMS.
There can be no assurances as to the final outcome of the
arbitration.
A separate patent infringement action that the Company filed in
March 2004 against Bayer remains pending in the United States
District Court for the Southern District of California. This
action alleges that Bayer’s bDNA nucleic acid tests for HIV
and HCV infringe Gen-Probe’s U.S. patent no.
5,955,261, entitled “Method for Detecting the Presence of
Group-Specific Viral mRNA in a Sample,” the “‘261
patent.” Bayer’s bDNA tests are not covered by the
collaboration agreement between the companies. Bayer has denied
the allegations of infringement and alleged that the ‘261
patent is invalid or unenforceable. On August 10, 2005, the
Company subsequently amended its complaint to further allege
that Bayer’s HIV and HCV bDNA tests also infringe
Gen-Probe’s U.S. patent no. 5,424,413, entitled
“Branched Nucleic Acid Probes” and Gen-Probe’s
U.S. patent no. 5,451,503, entitled “Method for Use of
Branched Nucleic Acid Probes.” On August 23, 2005,
Gen-Probe filed a second patent infringement action against
Bayer, alleging that Bayer’s bDNA nucleic acid test for
hepatitis B virus (“HBV”) infringes the ‘261
patent and further alleging that Bayer’s bDNA nucleic acid
test for HCV infringes Gen-Probe’s U.S. patent no.
5,030,557, entitled “Means and Method for Enhancing Nucleic
Acid Hybridization Assays.”
No trial date has been set for either patent infringement case.
There can be no assurances as to the final outcome of the
litigation.
On October 4, 2005, Bayer filed a demand for arbitration
against the Company with the JAMS office in San Francisco,
California related to the Company’s collaboration with
Bayer for nucleic acid diagnostic tests for viral organisms. At
the same time, Bayer filed a civil lawsuit against the Company
in Superior Court of Massachusetts for Middlesex County. In both
the demand for arbitration and the complaint, Bayer alleges
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that the Company is developing real-time diagnostic assays for
HIV and HCV that are covered by certain patents, without the
authorization of the patent owner. The subject patents were
issued to Chiron Corporation and licensed non-exclusively to
Bayer. On October 17, 2005, the Company removed the state
court suit to federal court in Boston. On October 21, 2005,
Bayer moved to remand the case to the Massachusetts state court.
On October 27, 2005, the Company filed a motion to dismiss
the case. Both motions are under submission for decision by the
court. The Company intends to vigorously defend Bayer’s
allegations. However, there can be no assurance that these
matters will be resolved in the Company’s favor.
| Item 4. | Submission of Matters to a Vote of Security Holders |
No matters were submitted to a vote of security holders during
the quarter ended December 31, 2005.
PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Our common stock has been traded on The Nasdaq National Market
since September 16, 2002 under the symbol GPRO. Prior to
that time, there was no public market for our common stock. The
following table sets forth the high and low sale prices for our
common stock as reported on The Nasdaq National Market for the
periods indicated.
| High | Low | |||||||
| 2004 | ||||||||
|
First Quarter
|
$ | 39.93 | $ | 31.40 | ||||
|
Second Quarter
|
$ | 47.61 | $ | 32.80 | ||||
|
Third Quarter
|
$ | 45.63 | $ | 29.40 | ||||
|
Fourth Quarter
|
$ | 47.10 | $ | 31.52 | ||||
| High | Low | |||||||
| 2005 | ||||||||
|
First Quarter
|
$ | 52.65 | $ | 42.65 | ||||
|
Second Quarter
|
$ | 53.14 | $ | 35.40 | ||||
|
Third Quarter
|
$ | 49.96 | $ | 36.07 | ||||
|
Fourth Quarter
|
$ | 50.14 | $ | 38.36 | ||||
As of February 28, 2006, there were approximately 7,271
stockholders of record of our common stock. We have not paid any
cash dividends to date and do not anticipate any being paid in
the foreseeable future.
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| Item 6. | Selected Financial Data |
SELECTED FINANCIAL INFORMATION
The selected financial data set forth below with respect to our
consolidated statements of income for each of the three years in
the period ended December 31, 2005 and, with respect to our
consolidated balance sheets, at December 31, 2005 and 2004
are derived from our consolidated financial statements that have
been audited by Ernst & Young LLP, independent
registered public accounting firm, which are included elsewhere
in this report. The statement of income data for the years ended
December 31, 2002 and 2001 and the balance sheet data as of
December 31, 2003, 2002, and 2001 are derived from our
audited consolidated financial statements that are not included
in this report. The selected financial information set forth
below should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” and our consolidated financial statements and
related notes appearing elsewhere in this report.
| 2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||||||
|
Statement of income data for the years ended
December 31:
|
|||||||||||||||||||||
|
Revenues:
|
|||||||||||||||||||||
|
Product sales
|
$ | 271,650 | $ | 222,560 | $ | 188,645 | $ | 139,932 | $ | 104,233 | |||||||||||
|
Collaborative research revenue
|
25,843 | 27,122 | 15,402 | 11,032 | 20,203 | ||||||||||||||||
|
Royalty and license revenue
|
8,472 | 20,025 | 3,144 | 4,633 | 5,295 | ||||||||||||||||
|
Total revenues
|
305,965 | 269,707 | 207,191 | 155,597 | 129,731 | ||||||||||||||||
|
Operating expenses:
|
|||||||||||||||||||||
|
Cost of product sales
|
83,900 | 59,908 | 45,458 | 53,411 | 38,954 | ||||||||||||||||
|
Research and development
|
71,846 | 68,482 | 63,565 | 47,045 | 54,915 | ||||||||||||||||
|
Marketing and sales
|
31,145 | 27,191 | 22,586 | 18,199 | 16,247 | ||||||||||||||||
|
General and administrative
|
32,107 | 31,628 | 23,233 | 20,995 | 15,564 | ||||||||||||||||
|
Total operating expenses
|
218,998 | 187,209 | 154,842 | 139,650 | 125,680 | ||||||||||||||||
|
Income from operations
|
86,967 | 82,498 | 52,349 | 15,947 | 4,051 | ||||||||||||||||
|
Net income
|
$ | 60,089 | $ | 54,575 | $ | 35,330 | $ | 13,007 | $ | 4,617 | |||||||||||
|
Net income per share:
|
|||||||||||||||||||||
|
Basic
|
$ | 1.19 | $ | 1.10 | $ | 0.74 | $ | 0.27 | $ | 0.10 | |||||||||||
|
Diluted
|
$ | 1.15 | $ | 1.06 | $ | 0.72 | $ | 0.27 | $ | 0.10 | |||||||||||
|
Weighted average shares outstanding:
|
|||||||||||||||||||||
|
Basic
|
50,617 | 49,429 | 47,974 | 47,600 | 47,600 | ||||||||||||||||
|
Diluted
|
52,445 | 51,403 | 49,137 | 47,610 | 47,606 | ||||||||||||||||
|
Balance sheet data as of December 31:
|
|||||||||||||||||||||
|
Cash, cash equivalents and short-term investments
|
$ | 220,288 | $ | 193,826 | $ | 156,306 | $ | 107,960 | $ | 17,750 | |||||||||||
|
Working capital
|
262,659 | 234,202 | 169,000 | 115,288 | 29,765 | ||||||||||||||||
|
Total assets
|
510,236 | 411,082 | 324,741 | 258,157 | 160,347 | ||||||||||||||||
|
Long-term debt, including current portion
|
— | — | — | — | 12,000 | ||||||||||||||||
|
Stockholders’ equity
|
447,373 | 361,029 | 270,375 | 215,578 | 115,807 | ||||||||||||||||
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Table of Contents
| Item 7. | 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,” “pro forma”
or “anticipates,” or other similar words (including
their use in the negative). Forward-looking statements are not
guarantees of performance. They involve known and unknown risks,
uncertainties and assumptions that may cause actual results,
levels of activity, performance or achievements to differ
materially from any results, level of activity, performance or
achievements expressed or implied by any forward-looking
statement. These risks and uncertainties include those under the
caption “Item 1A — Risk Factors.” We
assume no obligation to update any forward-looking statements.
The audited consolidated financial statements and this
Management’s Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with the
Consolidated Financial Statements and Notes thereto for the
years ended December 31, 2005, 2004 and 2003 in this Annual
Report on Form 10-K.
Overview
We are a global leader in the development, manufacture and
marketing of rapid, accurate and cost-effective nucleic acid
probe-based products used for the clinical diagnosis of human
diseases and for screening of 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 over 23 years of nucleic acid
detection research and product development experience, 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 in countries throughout the world.
We have achieved strong growth in both revenues and earnings due
principally to the success of our blood screening products which
are used to detect the presence of human immunodeficiency virus
(type 1), or HIV-1, and
hepatitis C virus, or HCV, and hepatitis B virus, or HBV.
Under our collaboration agreement with Chiron Corporation, or
Chiron, we are responsible for the research, development,
regulatory process and manufacturing of our blood screening
products, while Chiron is responsible for marketing, sales,
distribution and service of those products. Since 2002, we have
also experienced strong growth in clinical diagnostics for
sexually transmitted diseases, or STDs, due to the success of
APTIMA Combo 2.
Recent Events
| Financial Results |
Product sales for 2005 were $271.7 million, compared to
$222.6 million in 2004, an increase of 22%. Product sales
in 2005 included approximately $5.4 million due to the
recognition of previously deferred revenue related to
U.S. blood screening products shipped to Chiron’s
recently established third party warehouse, whereas in the past,
we held such inventory in the virtual warehouse and deferred
revenue recognition until products were shipped to Chiron’s
end-customers. Total revenues for 2005 were $306.0 million,
compared to $269.7 million in 2004, an increase of 13%. Net
income for the year was $60.1 million ($1.15 per
diluted share), compared to $54.6 million ($1.06 per
diluted share) in 2004, an increase of 10%. The prior year total
revenue and net income included a contract milestone of
$6.5 million from Chiron and a license fee of
$7.0 million earned in connection with our cross-licensing
agreement with Tosoh Corporation, or Tosoh. These amounts added
approximately $13.5 million to 2004 revenues and $0.17 to
2004 diluted earnings per share.
| Corporate Collaborations |
In October 2005, we entered into a non-exclusive collaboration
with Molecular Profiling Institute, Inc., a private company, to
accelerate market development for our pipeline of cancer
diagnostics. Under the terms of
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the agreement, Molecular Profiling has agreed to validate,
commercialize and undertake market development activities for up
to four of our products, starting with our investigational PCA3
assay, which is intended as an aid in the diagnosis of prostate
cancer. In addition, in October 2005, we purchased from
Molecular Profiling an aggregate of 1,000,000 shares of
Series B Preferred Stock at a purchase price per share of
$2.50. We have recorded this $2.5 million investment on a
cost basis, and will review the asset for impairment on an
ongoing basis.
In August 2005, we entered into a collaboration agreement with
Millipore Corporation, or Millipore, to develop, manufacture and
commercialize NAT products for rapid microbiological and viral
monitoring for Millipore’s exclusive use or sale in process
monitoring in the biotechnology and pharmaceutical manufacturing
industries. Under the terms of the agreement, we will be
primarily responsible for assay development and manufacturing,
while Millipore will manage worldwide commercialization of any
products resulting from the collaboration.
In July 2005, we entered into a collaboration agreement with GE
Infrastructure Water and Process Technologies, or GEI, a unit of
General Electric Company, to develop, manufacture and
commercialize NAT products designed to detect the unique genetic
sequences of microorganisms for GEI’s exclusive use or sale
in selected water testing applications. Under the terms of the
agreement, we will be primarily responsible for assay
development and manufacturing, while GEI will manage worldwide
commercialization of any products resulting from the
collaboration.
In June 2005, we entered into a research agreement with
SmithKline Beecham Corporation, doing business as
GlaxoSmithKline, and SmithKline Beecham (Cork) Ltd., together
referred to as GSK. Under the terms of the agreement, we agreed
to provide our investigational PCA3 assay to test up to 6,800
clinical samples obtained from patients enrolled in GSK’s
REDUCEtm
(REduction by DUtasteride of prostate Cancer Events) clinical
trial, which is designed to determine the efficacy and safety of
GSK’s drug dutasteride
(AVODART®)
in reducing the risk of prostate cancer in men at increased risk
of this disease. Collection of urine samples from selected study
sites will commence pending approvals by regulatory authorities
and appropriate study sites’ ethics committees. We agreed
to reimburse GSK for expenses that GSK incurs for sample
collection and related processes during the four-year
prospective clinical trial. We also agreed to provide the PCA3
assay without charge and to pay third party clinical laboratory
expenses for using the assay to test the samples.
| Licensing |
In January and December 2005, bioMérieux’s affiliates
exercised options to develop diagnostic products for certain
selected undisclosed disease targets using our patented
ribosomal RNA technologies pursuant to the terms of a September
2004 agreement. In exchange for these rights,
bioMérieux’s affiliates paid us $6.6 million in
license fees, and $0.25 million as an option fee. We
recorded $3.9 million of these fees as license revenue in
2005, based on the number of targets selected and the total
number of targets that may be selected by the end of 2006. The
amount and timing of additional revenue that we record will
depend on the number of additional targets, if any, selected by
bioMérieux’s affiliates, which have options to develop
diagnostic products for other disease targets that they may
select by paying us up to an additional $0.9 million by the
end of 2006. We will receive royalties on the sale of any
products developed by bioMérieux’s affiliates using
our intellectual property.
In January 2005, we entered into a license agreement with Corixa
Corporation, or Corixa, and received the right to develop
molecular diagnostic tests for multiple potential genetic
markers in the areas of prostate, ovarian, cervical, kidney,
lung and colon cancers. Pursuant to the terms of the agreement,
we paid Corixa an initial access fee of $1.6 million, an
additional $1.6 million in February 2006 and have agreed to
pay an additional $1.6 million on January 31, 2007,
unless we terminate the agreement prior to that date. We have
recorded the collective $3.2 million of license fees as an
intangible asset which is being amortized on a straight-line
basis to research and development expense over the underlying
life of the patents. We also agreed to pay Corixa milestone
payments totaling an additional $2.0 million on a
product-by-product basis based on
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the occurrence of certain regulatory and/or commercial events.
We agreed to pay Corixa additional milestone payments and
royalties on net sales of any products developed by us using
Corixa’s technology.
In December 2004, we entered into a license agreement with
AdnaGen AG, or AdnaGen, to license from AdnaGen cell capture
technology for use in our molecular diagnostic tests to detect
prostate and other cancers. Under the terms of the agreement, we
recorded license fees of $1.75 million ($0.75 million
in 2006 and $1.0 million in 2004), which have been recorded
as research and development, or R&D, expenses, since we have
not yet determined technological feasibility and do not
currently have alternative future plans to use this technology
other than for our prostate cancer development program. Upon the
occurrence of certain clinical, regulatory and/or commercial
events, we agreed to pay AdnaGen up to three milestone payments
totaling an additional $2.25 million. Further, we agreed to
pay AdnaGen royalties on net sales of any products we develop
using AdnaGen’s technology.
In November 2004, we entered into an agreement with Qualigen,
Inc. under which we have an exclusive option to develop and
commercialize a NAT instrument designed for use at the point of
sample collection based on Qualigen’s FDA-approved FastPack
immunoassay system. If successfully developed, the portable
instrument would use our NAT technology to detect, at the point
of sample collection, the presence of harmful microorganisms,
genetic mutations and other markers of diseases. Under the terms
of the agreement, we paid Qualigen $1.0 million for an
18-month option to
license, on an exclusive worldwide basis, Qualigen’s
technology to develop NAT assays for the clinical diagnostics,
blood screening and industrial fields. During this period, we
are evaluating the feasibility of adapting Qualigen’s
immunoassay platform to perform NAT using our proprietary
technologies. If we exercise this option, we will purchase
shares of Qualigen preferred stock convertible into
approximately 19.5% of Qualigen’s then outstanding fully
diluted common shares. The cost of acquiring this equity
interest would be approximately $7.0 million. In addition,
we may pay Qualigen up to $3.0 million in license fees
based on development milestones, as well as royalties on any
eventual product sales. We recorded the $1.0 million option
fee as an intangible asset which is being amortized over the
18-month evaluation
period of the option or until execution of the license,
whichever comes first.
In September 2004, we entered into a Settlement Agreement and an
Amendment to our Non-exclusive License Agreement with Vysis,
Inc., or Vysis, under which we withdrew our patent litigation
against Vysis and agreed to pay Vysis (which was acquired by
Abbott) an aggregate of $22.5 million. This amount included
$20.5 million for a fully paid up license to eliminate all
of our future royalty obligations to Vysis under the Collins
patent covered by the license, and $2.0 million for a fully
paid-up, royalty-free license in additional fields under the
Collins patent. We had been paying royalties under a
pre-existing license agreement which has since been amended. The
license now covers current and future products in the field of
infectious diseases, as well as potential products in all other
fields. Chiron reimbursed us $5.5 million of the
$20.5 million allocated to the cost of the fully
paid-up license for the
current field, commensurate with its obligation to reimburse us
for a portion of the royalties due on the sale of blood
screening products. We recorded the $17.0 million net
payment ($22.5 million less Chiron’s $5.5 million
reimbursement) to Vysis as an intangible asset, which is being
amortized to cost of goods sold over the patent’s remaining
economic life of 135 months.
| Supply Agreements |
In February 2005, we entered into a supply and purchase
agreement with F. Hoffmann-La Roche Ltd. and its affiliate
Roche Molecular Systems, Inc., or Roche. Under this agreement,
Roche agreed to manufacture and supply to us DNA
oligonucleotides for human papillomavirus, or HPV. We plan to
use these oligonucleotides in molecular diagnostic assays.
Pursuant to the agreement, we paid Roche manufacturing access
fees of $20.0 million in May 2005 and agreed to pay
$10.0 million within 10 days of the occurrence of
certain future commercial events, but not later than
December 1, 2008. We also agreed to pay Roche transfer fees
for the HPV oligonucleotides. The initial $20.0 million
manufacturing fee has been recorded as an intangible asset
which, upon commercialization of the our HPV products, is
expected to be amortized to cost of product sales over the
economic life of the products.
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| Product Development |
On December 1, 2005, the FDA granted marketing approval for
our West Nile virus, or WNV, assay on the enhanced
semi-automated system, or eSAS, to screen donated human blood.
The 510(k) clearance of eSAS for use with the WNV assay was
granted prior to the assay’s approval. We intend to submit
for 510(k) clearance of the TIGRIS instrument for use with the
WNV assay in the first part of 2006. We plan to submit a
(post-approval) supplement to our WNV Biologics License
Application, or BLA, adding the TIGRIS instrument, at
approximately the same time.
In October 2005, the FDA notified us that it considers our
TIGRIS instrument for blood screening “not substantially
equivalent” to our already cleared eSAS for screening
donated human blood with the Procleix Ultrio assay. The FDA made
this determination in response to our 510(k) application for the
TIGRIS instrument for blood screening. Also in October 2005, we
received a “complete review letter” from the FDA
setting forth questions regarding our BLA for the Procleix
Ultrio assay itself. We anticipate submitting a BLA amendment
for the Procleix Ultrio assay for use on eSAS, responding to the
FDA’s questions, by the end of the first quarter of 2006.
We anticipate submitting a new 510(k) application for the TIGRIS
instrument for use with the Procleix Ultrio assay following
clearance of the TIGRIS instrument for use with the WNV assay.
We anticipate submitting a (post-approval) BLA supplement for
the Procleix Ultrio assay, for use on the TIGRIS instrument,
following approval of the BLA for the Procleix Ultrio assay on
eSAS. There can be no assurance that the Procleix Ultrio assay
will receive regulatory approval by the FDA or that the TIGRIS
instrument will receive FDA clearance for use with the WNV or
Procleix Ultrio assays.
In August 2005, the FDA granted marketing clearance to use the
APTIMA Combo 2 assay to test for Chlamydia trachomatis
and Neisseria gonorrhoeae from liquid Pap specimens
collected and processed with Cytyc Corporation’s ThinPrep
2000 system. This new use provides physicians the convenience of
intercepting Chlamydia infections and gonorrhea from the same
sample collected for the ThinPrep Pap Test. The Pap test remains
the most widely used screening test in the United States for the
early detection of cervical cancer. We anticipate filing for
regulatory clearance in the United States of a similar
application from TriPath’s liquid Pap transport media in
2006.
| Arbitration Award |
In April 2005, we received a Tentative Opinion and Award in our
arbitration with Bayer HealthCare, LLC concerning the
parties’ collaboration for the development and sale of
nucleic acid diagnostic tests for viral organisms. In June 2005,
the arbitrator issued an Interim Opinion and Award that adopted
all substantive rulings of the Tentative Opinion and Award. The
arbitrator determined that we are entitled to a co-exclusive
right to distribute qualitative Transcription-Mediated
Amplification, or TMA, assays to detect HCV and HIV-1 for the
remaining term of the agreement. Bayer previously held the
exclusive rights to market these products. The arbitrator also
determined that the collaboration agreement should be
prospectively terminated, as we requested. As a result of a
termination of the agreement, we will have the right to develop
and market future viral assays that had been previously reserved
for Bayer. Bayer will retain co-exclusive rights to distribute
two products that it currently markets. Further, the arbitrator
determined that Bayer will be required to reimburse us
$2.0 million for our legal fees and expenses related to the
arbitration proceedings. In the June 2005 Interim Opinion and
Award, the arbitrator also concluded that an additional hearing
would be required to determine whether a royalty payment would
be required as a result of our exercise of our co-exclusive
rights to distribute the qualitative TMA assays for HCV and
HIV-1, and, if so, the
amount and beneficiary of such royalties. The additional hearing
took place in September 2005. On March 3, 2006, the
arbitrator issued his Tentative Award following the additional
hearing. The arbitrator concluded that Gen-Probe is licensed
under the relevant HIV and HCV patents for qualitative assays
during the term of the collaboration agreement and that the
Company is not obligated to pay Bayer an initial license fee in
connection with the sale of those assays. The arbitrator further
concluded that the Company will be required to pay running sales
royalties to Bayer on the Company’s sales of the
qualitative TMA assays for HCV and HIV-1. We believe the royalty
rates are generally consistent with rates paid by other
licensees of the relevant patents. The March 3, 2006
Tentative Award is subject to revision by the arbitrator
following comments by the parties. The arbitrator’s final
decision in this matter is subject to a right to appeal to an
arbitration appeal panel within the Judicial
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Table of Contents
Arbitration & Mediation Services, Inc., or JAMS. There
can be no assurances as to the final outcome of the arbitration.
Revenues
We derive revenues from three primary sources: product sales,
collaborative research revenue and royalty and license revenue.
The majority of our revenues come from product sales, which
consist primarily of sales of our NAT assays tested on our
proprietary instruments that serve as the analytical platform
for our assays. We recognize as collaborative research revenue
payments we receive from Chiron for the products provided under
our collaboration agreements with Chiron prior to regulatory
approval, and the payments we receive from Chiron, Bayer
Corporation, or Bayer, and other collaboration partners for
research and development activities. Our royalty and license
revenues reflect fees paid to us by third parties for the use of
our proprietary technology. In 2005, product sales,
collaborative research revenues and royalty and license revenues
equaled 89%, 8% and 3%, respectively, of our total revenues of
$306.0 million.
| Product sales |
Our primary source of revenue is the sale of clinical diagnostic
and blood screening products in the United States. Our clinical
diagnostic products include our APTIMA Combo 2,
PACE 2, AccuProbe and Amplified Mycobacterium Tuberculosis
Direct Test product lines. During 2005, we shipped approximately
21.4 million tests for the diagnosis of a wide variety of
infectious microorganisms, including those causing STDs,
tuberculosis, strep throat, pneumonia and fungal infections. The
principal customers for our clinical diagnostics products
include large reference laboratories, public health laboratories
and hospitals located in North America, Europe and Japan.
Since 1999, we have supplied NAT assays for use in screening
blood donations intended for transfusion. Our primary blood
screening assay detects HIV-1 and HCV in donated human blood.
Our blood screening assays and instruments are marketed through
our collaboration with Chiron 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
Chiron for sales to blood bank facilities located in countries
where our products have obtained governmental approvals. Blood
screening product sales are then adjusted monthly corresponding
to Chiron’s payment to us of amounts reflecting our
ultimate share of net revenue from sales by Chiron to the end
user, less the transfer price revenues previously recorded. Net
sales are ultimately equal to the sales of the assays by Chiron
to third-parties, less freight, duty and certain other
adjustments specified in our agreement with Chiron, multiplied
by our share of the net revenue. Our share of the net revenue
was 43.0% with respect to sales of assays that include a test
for HCV beginning the second quarter of 2002 (following FDA
approval in February 2002) upon implementation of commercial
pricing, through April 6, 2003, after which our share of
net revenues from sales of assays that include a test for HCV
was adjusted to 47.5%. Effective January 1, 2004, our share
of net revenues from commercial sales of assays that include a
test for HCV was permanently changed to 45.75% under our
agreement with Chiron. With respect to commercial sales of blood
screening assays under our collaboration with Chiron that do not
include a test for HCV, such as possible future commercial tests
for WNV, we will receive 50% of net revenues after deduction of
appropriate expenses. Our costs related to these products
primarily include manufacturing costs.
| Collaborative research revenue |
We have recorded 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. In 2005 and 2004, we
recognized $18.4 million and $18.5 million,
respectively, as collaborative research revenue through our
collaboration with Chiron from deliveries of WNV tests on a
“cost recovery” basis. In 2005 and 2004, we recognized
$2.0 million and $1.4 million respectively, in
reimbursements for expenses incurred for WNV development
research as collaborative research revenue. We expect to
discontinue recognizing these sales as collaborative research
revenue upon first shipment of the FDA
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approved and labeled product. In December 2005, the FDA granted
marketing approval for our WNV assay on eSAS to screen donated
human blood. The 510(k) clearance of eSAS for use with the WNV
assay was granted prior to the assay’s approval. We intend
to submit for 510(k) clearance of the TIGRIS instrument for use
with the WNV assay in the first part of 2006. We plan to submit
a (post-approval) supplement to our WNV assay BLA, adding the
TIGRIS instrument, at approximately the same time.
In March 2003, we signed a definitive agreement with Chiron for
the development and commercialization of the Procleix Ultrio
assay. In each of 2005 and 2004, we recognized $2.8 million
in reimbursements for expenses incurred related to the
development of this assay. We expect to receive further
reimbursement from Chiron for certain costs incurred during the
development of the Procleix Ultrio and WNV assays. In January
2004, we commenced clinical trials of the Procleix Ultrio assay
in the United States on our TIGRIS instrument. In September
2004, we filed a BLA with the FDA for this assay. In October
2005, we received a “complete review letter” from the
FDA setting forth additional questions regarding our BLA for the
Procleix Ultrio assay. We anticipate submitting a BLA amendment
for the Procleix Ultrio assay for use on eSAS, responding to
FDA’s questions, by the end of the first quarter of 2006.
We anticipate submitting a new 510(k) application for the TIGRIS
instrument for use with the Procleix Ultrio assay following
clearance of the TIGRIS instrument for use with the WNV assay.
We anticipate submitting a (post-approval) BLA supplement for
the Procleix Ultrio assay, for use on the TIGRIS instrument,
following approval of the BLA for the Procleix Ultrio assay on
eSAS. There can be no assurance that the Procleix Ultrio assay
will receive regulatory approval by the FDA or that the TIGRIS
instrument will receive FDA clearance for use with the WNV or
Procleix Ultrio assays.
We recognize collaborative research revenue over the term of
certain strategic alliance agreements with Chiron and others as
reimbursable costs are incurred. The costs associated with the
reported collaborative research revenue are based on fully
burdened full time equivalent, or FTE, rates and are reflected
in our 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 our blood screening development collaboration with
Chiron and, therefore, are not able to quantify all of the
direct costs associated with collaborative research revenue.
| Royalty and license revenue |
We recognize non-refundable up-front license fees over the
performance period of an agreement or at the time that we have
satisfied all substantive performance obligations of an
agreement. We also receive milestone payments for successful
achievement of contractual development activities. Milestone
payments are recognized as revenue upon the achievement of
specified milestones when (i) we have earned the milestone
payment, (ii) the milestone is substantive in nature and
the achievement of the milestone is not reasonably assured at
the inception of the agreement, (iii) the fees are
non-refundable, and (iv) our performance obligations after
the milestone achievement will continue to be funded by our
collaborator at a level comparable to the level before the
milestone achievement. Any amounts received prior to satisfying
our revenue recognition criteria are recorded as deferred
revenue on our balance sheet.
Under the strategic alliance agreement we entered into with
Chiron in June 1998, we have responsibility for research,
development and manufacturing of the blood screening products
covered by the agreement, while Chiron has responsibility for
marketing, distribution and service of the blood screening
products worldwide. During 2004, we recognized as royalty and
license revenue, a $6.5 million milestone payment from
Chiron as we commenced clinical trials of the Procleix Ultrio
assay on our TIGRIS instrument in the United States. Under the
terms of the agreement, an additional payment of
$10.0 million is due to us in the future if we obtain FDA
approval of our Procleix Ultrio assay for use on the TIGRIS
instrument. There is no guarantee we will achieve this milestone
and receive any additional milestone payments under this
agreement. In October 2005, the FDA notified us that it
considers our TIGRIS instrument for blood screening “not
substantially equivalent” to our already cleared eSAS for
screening donated human blood with the Procleix Ultrio assay.
Also in October 2005, we received a “complete review
letter” from the FDA setting forth additional questions
regarding our BLA for the Procleix Ultrio assay itself. There
can be no assurance that these products will receive regulatory
clearance by the FDA.
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| Cost of product sales |
Cost of product sales includes direct material, direct labor,
and manufacturing overhead associated with the production of
inventory on a standard cost basis. Other components of cost of
product sales include royalties, warranty costs, instrument and
software amortization and allowances for scrap.
In addition, we manufacture significant quantities of raw
materials, development lots, and clinical trial lots of product
prior to receiving FDA approval for commercial sale. During 2005
and 2004, our manufacturing facilities produced development lots
for WNV and Procleix Ultrio assays. The majority of costs
associated with these development lots are classified as
research and development 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 and will continue
to operate below its potential capacity for the foreseeable
future. A portion of this available capacity is utilized for
research and development activities as new product offerings are
developed for commercialization. As a result, certain operating
costs of our blood screening 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
research and development expense prior to FDA approval.
In 2005, the growth in blood screening revenues was partially
driven by sales of TIGRIS instruments to Chiron totaling
approximately $9.0 million. Under our contract with Chiron,
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 higher sales of blood screening assays
in the future.
| Research and development |
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
co-development of new products and technologies in collaboration
with our strategic partners. R&D spending is expected to
increase in the future due to new product development, clinical
trial costs and clinical manufacturing costs; however, we expect
our R&D expenses as a percentage of total revenues to
decline in future years. The timing of clinical trials and
development manufacturing costs is variable and is affected by
product development activities and the regulatory process.
In connection with our R&D efforts, we have various license
agreements that provide us with rights to develop and market
products using certain technologies and patent rights maintained
by third parties. These agreements generally provide for a term
that commences upon execution of the agreement and continues
until expiration of the last patent related to the technologies
covered by the license.
R&D expenses include the costs of raw materials, development
lots and clinical trial lots of products that we manufacture.
These costs are 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 developmental lots and
clinical trial lots for our blood screening products and with
further development of our TIGRIS instrument. Collaborative
research revenues associated with these types of costs have at
times been realized in a period later than when the costs were
incurred due to the need for clarification on the extent of
reimbursable costs.
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 invento-
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ries, long-lived assets including patent costs and capitalized
software, and income taxes. We base our estimates on historical
experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of 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 the following critical accounting policies affect the
significant judgments and estimates used in the preparation of
our consolidated financial statements.
| Revenue recognition |
We record shipments of our clinical diagnostic products as
product sales when the product is shipped and title and risk of
loss has passed and when collection of the resulting receivable
is reasonably assured. Revenue from our blood screening products
shipped to countries where regulatory approval has been received
is recorded as product sales based on a contracted transfer
price with our third-party collaboration partner, Chiron. Based
on the terms of our agreement with Chiron, our ultimate share of
the net revenue from sales to the end user is not known until
reported to us by Chiron.
We manufacture our blood screening products according to
Chiron’s demand specifications and transfer completed
product to Chiron’s virtual warehouse, which is located on
our premises. Upon transfer to Chiron’s virtual warehouse,
we bill Chiron at an agreed upon transfer price, and Chiron
remits payment within 30 days. In the past, we recorded all
amounts billed as deferred revenue until shipment from the
virtual warehouse to Chiron’s end-customers or
Chiron’s international warehouse; upon which we then
recognized blood screening product sales at the transfer price
and recorded the related cost of products sold. We then adjusted
blood screening product sales upon our receipt of customer
revenue reports and a net payment from Chiron of amounts
reflecting our ultimate share of net sales by Chiron of these
products, less the transfer price revenues previously paid.
During 2005, our U.S. blood screening sales increased by
approximately $5.4 million due to the recognition of
previously deferred revenue resulting from our shipment of
Chiron controlled blood screening products from Chiron’s
virtual warehouse to their recently established third party
warehouse, rather than directly to their end-customers.
Product sales also include the sales or rental value associated
with the delivery of our proprietary integrated instrument
platforms that perform our diagnostic assays. Generally, we
provide our instrumentation to clinical laboratories and
hospitals without requiring them to purchase the equipment or
enter into an equipment lease. Instead, we recover the cost of
providing the instrumentation in the amounts we charge for our
diagnostic assays. We have also implemented multi-year sales
contracts that have an equipment factor set forth in them. The
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 the TIGRIS instrument and DTS
800/1600 instruments. The costs to maintain these instruments in
the field are charged to cost of product sales as incurred.
We sell instruments to Chiron for use in blood screening and
record these instrument sales upon delivery since Chiron is
responsible for the placement, maintenance and repair of the
units with their customers. We also sell instruments to our
clinical diagnostics customers. We record sales of these
instruments as product sales upon delivery and receipt of
customer acceptance. Prior to delivery, each instrument is
tested to meet Company and FDA specifications, and is shipped
fully assembled. Customer acceptance of our instrument systems
requires installation and training by our technical service
personnel. Generally, installation is a standard process
consisting principally of uncrating, calibrating, and testing
the instrumentation.
We record as collaborative research revenue shipments of our
blood screening products in the United States and other
countries in which the products have not received regulatory
approval. We do this because price restrictions apply to these
products prior to FDA marketing approval in the United States and
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similar approvals in foreign countries. Upon first shipment of
FDA approved and labeled product following commercial approval,
we classify sales of these products as product sales in our
financial statements.
We recognize collaborative research revenue over the term of
various collaboration agreements, as negotiated monthly
contracted amounts are earned or reimbursable costs are incurred
related to those agreements. Negotiated monthly contracted
amounts are earned in relative proportion to the performance
required under the contracts. Non-refundable license fees are
recognized over the related performance period or at the time
that we have satisfied all performance obligations related to
the agreement. Milestone payments are recognized as revenue upon
the achievement of specified milestones when (i) we have
earned the milestone payment, (ii) the milestone is
substantive in nature and the achievement of the milestone is
not reasonably assured at the inception of the agreement,
(iii) the fees are non-refundable, and (iv) our
performance obligations after the milestone achievement will
continue to be funded by our collaborator at a level comparable
to the level before the milestone achievement. Any amounts
received prior to satisfying our revenue recognition criteria
are recorded as deferred revenue on our balance sheet.
We recognize royalty revenue related to 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.
| Collectibility of accounts receivable |
We maintain an allowance for doubtful accounts for estimated
losses resulting from the inability of our customers to make
required payments. Credit losses historically have been minimal
and within management’s expectations. If the financial
condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional
allowances would be required.
| Valuation of inventories |
We record valuation adjustments to our inventory balances for
estimated excess and obsolete inventory equal to the difference
between the cost of such inventory and its usage based upon
assumptions about future product demand and the shelf-life and
expiration dates for finished goods and materials used in the
manufacturing process. We operate in an environment that is
regulated by the FDA and other governmental agencies that may
place restrictions on our ability to sell our products into the
marketplace if certain compliance requirements are not met. We
have made assumptions that are reflected in arriving at our net
inventory value based on information currently available to us.
If future product demand, regulatory constraints or other market
conditions are less favorable than those projected by
management, additional inventory valuation reserves may be
required.
We also manufacture products to conduct developmental
evaluations and clinical trials, and to validate our
manufacturing practices prior to receiving regulatory clearance
for commercial sale of our products. In these circumstances,
uncertainty exists regarding our ability to sell these products
until the FDA or other governing bodies commercially approve
them. Accordingly, the manufacturing costs of these items in
inventory are recorded as R&D expense. In cases where we
maintain current approved products for further development
evaluations, we may also provide valuation allowances for this
inventory due to the historical uncertainties associated with
regulated product introductions into other markets. To the
extent any of these products are sold to end users, we record
revenues and reduce inventory reserves that are directly
applicable to such products.
| Valuation of goodwill |
We assess the impairment of goodwill whenever events or changes
in circumstances indicate that the carrying value may not be
recoverable. Impairment is reviewed at least annually, generally
in the fourth quarter of each year.
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Factors we consider important which could trigger an impairment,
include the following:
| • | Significant underperformance relative to historical or projected future operating results; | |
| • | Significant changes in the manner of our use of the acquired assets or the strategy for our overall business; | |
| • | Significant negative industry or economic trends; | |
| • | Significant declines in our stock price for a sustained period; and | |
| • | Decreased market capitalization relative to net book value. |
When there is an indication that the carrying value of goodwill
may not be recoverable based upon the existence of one or more
of the above indicators, an impairment loss is recognized if the
carrying amount exceeds its fair value. To date, there have been
no indicators of impairment.
| Capitalized software costs |
We capitalize costs incurred in the development of computer
software related to products under development after
establishment of technological feasibility. These capitalized
costs are recorded at the lower of unamortized cost or net
realizable value and are amortized over the estimated life of
the related product. At December 31, 2005, capitalized
software development costs related to our TIGRIS instrument
totaled $21.0 million, net of accumulated amortization. We
completed beta evaluations of this instrument for clinical
diagnostic applications and undertook initial beta trials for
blood screening applications before we completed a clinical
trial for a diagnostic application in June 2003. In December
2003, we received approval from the FDA for testing our APTIMA
Combo 2 assay on the TIGRIS instrument. We initiated clinical
trials of our Procleix Ultrio assay on our TIGRIS instrument for
a blood screening application in January 2004 and filed a BLA
with the FDA for this assay in September 2004. In October 2005,
the FDA notified us that it considers our TIGRIS instrument for
blood screening “not substantially equivalent” to our
already cleared eSAS for screening donated human blood with the
Procleix Ultrio assay. The FDA made this determination in
response to our 510(k) application for the TIGRIS instrument for
blood screening. If we are not able to successfully deliver this
instrument to the marketplace and attain customer acceptance,
the asset could be impaired and an adjustment to the carrying
value of this asset would be considered by management at that
time.
In accordance with Statement of Financial Accounting Standards,
or SFAS, No. 86, “Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed,” we
began amortizing the capitalized software costs on a
straight-line basis over 120 months in May 2004, coinciding
with the general release of TIGRIS instruments to our customers.
| Impairment of long-lived assets |
We assess the recoverability of long-lived assets by determining
whether the carrying value of such assets can be recovered
through undiscounted future operating cash flows. If impairment
is indicated, we measure the amount of such impairment by
comparing the fair value to the carrying value.
In February 2005, we entered into a supply and purchase
agreement with Roche whereby Roche agreed to manufacture and
supply us with oligonucleotides for HPV, which we plan to use in
molecular diagnostic assays. Under this agreement, we paid Roche
manufacturing access fees of $20.0 million in May 2005 and
expect to pay $10.0 million no later than December 2008.
The initial $20.0 million manufacturing access fee has been
recorded as an intangible asset that, upon commercialization of
our HPV oligonucleotides, will be amortized to cost of product
sales over the economic life of the products. Periodically, we
perform an impairment analysis to determine if we expect to
recover these costs through the future sales of HPV products. A
decrease in forecasted sales may result in impairment charges in
the future. We expect to develop an HPV test and our current
sales forecast indicates the payment is recoverable.
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| Income taxes |
Our income tax returns are based on calculations and assumptions
that are subject to examination by various tax authorities.
While we believe we have appropriate support for the positions
taken on our tax returns, we regularly assess the potential
outcomes of these examinations and any future examinations in
determining the adequacy of our provision for income taxes. As
part of our assessment of potential adjustments to our tax
returns, we increase our current tax liability to the extent an
adjustment would result in a cash tax payment or decrease our
deferred tax assets to the extent an adjustment would not result
in a cash tax payment. We review, at least quarterly, the
likelihood and amount of potential adjustments and adjust the
income tax provision, the current tax liability and deferred
taxes in the period in which the facts that give rise to a
revision become probable and estimable. Although we believe that
the estimates and assumptions supporting our assessments are
reasonable, adjustments could be materially different from those
which are reflected in historical income tax provisions and
recorded assets and liabilities.
We regularly review our deferred tax assets for recoverability
and establish a valuation allowance based on historical taxable
income, projected future taxable income, the expected timing of
the reversals of existing temporary differences and the
implementation of tax-planning strategies.
| Future accounting requirements |
In December 2004, the Financial Accounting Standards Board,
FASB, issued revised Statement 123, or
SFAS No. 123(R), “Share-Based Payment,”
which requires companies to expense the estimated fair value of
employee stock options and similar awards. In April 2005, the
SEC announced that the accounting provisions of
SFAS No. 123(R) will be effective for the first
quarter of 2006. We plan on adopting the provisions of
SFAS 123(R) using the modified prospective application,
which provides for certain changes to the method for valuing
share-based compensation. Under the modified prospective
application, prior periods are not revised for comparative
purposes. The valuation provisions of SFAS 123(R) apply to
new awards and to awards that are outstanding on the effective
date and subsequently modified or cancelled. At
December 31, 2005, unamortized compensation expense related
to outstanding unvested options, as determined in accordance
with SFAS No. 123, was approximately
$30.0 million before income taxes. In 2006, we will begin
to record this unamortized amount as stock compensation expense
pursuant to the vesting schedules of the underlying option
awards. We will incur additional expense related to new awards
granted after 2005 that cannot yet be quantified.
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| Results of Operations |
| Years Ended | |||||||||||||||||||||
| December 31, | % Change | ||||||||||||||||||||
| 2005 | 2004 | 2003 | 05/04 | 04/03 | |||||||||||||||||
| (In millions) | |||||||||||||||||||||
|
Statement of income:
|
|||||||||||||||||||||
|
Revenues:
|
|||||||||||||||||||||
|
Product sales
|
$ | 271.7 | $ | 222.6 | $ | 188.6 | 22 | % | 18 | % | |||||||||||
|
Collaborative research revenue
|
25.8 | 27.1 | 15.4 | (5 | )% | 76 | % | ||||||||||||||
|
Royalty and license revenue
|
8.5 | 20.0 | 3.2 | (58 | )% | 525 | % | ||||||||||||||
|
Total revenues
|
306.0 | 269.7 | 207.2 | 13 | % | 30 | % | ||||||||||||||
|
Operating expenses:
|
|||||||||||||||||||||
|
Cost of product sales
|
83.9 | 59.9 | 45.5 | 40 | % | 32 | % | ||||||||||||||
|
Research and development
|
71.9 | 68.5 | 63.6 | 5 | % | 8 | % | ||||||||||||||
|
Marketing and sales
|
31.1 | 27.2 | 22.6 | 14 | % | 20 | % | ||||||||||||||
|
General and administrative
|
32.1 | 31.6 | 23.2 | 2 | % | 36 | % | ||||||||||||||
|
Total operating expenses
|
219.0 | 187.2 | 154.9 | 17 | % | 21 | % | ||||||||||||||
|
Income from operations
|
87.0 | 82.5 | 52.3 | 5 | % | 58 | % | ||||||||||||||
|
Total other income, net
|
4.7 | 2.1 | 2.8 | 124 | % | (25 | )% | ||||||||||||||
|
Income tax expense
|
31.6 | 30.0 | 19.8 | 5 | % | 52 | % | ||||||||||||||
|
Net income
|
$ | 60.1 | $ | 54.6 | $ | 35.3 | 10 | % | 55 | % | |||||||||||
|
Net income per share
|
|||||||||||||||||||||
|
Basic
|
$ | 1.19 | $ | 1.10 | $ | 0.74 | 8 | % | 49 | % | |||||||||||
|
Diluted
|
$ | 1.15 | $ | 1.06 | $ | 0.72 | 8 | % | 47 | % | |||||||||||
|
Weighted average shares outstanding
|
|||||||||||||||||||||
|
Basic
|
50.6 | 49.4 | 48.0 | ||||||||||||||||||
|
Diluted
|
52.4 | 51.4 | 49.1 | ||||||||||||||||||
Amounts and percentages in this table and throughout our
discussion and analysis of financial conditions and results of
operations may reflect rounding adjustments. Percentages have
been rounded to the nearest whole percentage.
| Product sales |
Product sales increased 22% to $271.7 million in 2005 from
$222.6 million in 2004. The $49.1 million increase was
primarily attributed to $13.6 million in higher instrument
sales, $22.6 million in higher blood screening sales, and
$21.9 million in higher APTIMA Combo 2 assay sales,
partially offset by a $6.8 million decrease in PACE product
sales. Blood screening sales represented $130.0 million, or
48% of product sales, in 2005, compared to $95.6 million,
or 43% of product sales in 2004. The increase in blood screening
sales during 2005 was principally attributed to increased
international Procleix Ultrio assay sales volume and an increase
in instrument sales. Further, the current year’s product
sales included approximately $5.4 million due to the
recognition of previously deferred revenue related to United
States blood screening products shipped to Chiron’s
recently established third party warehouse, rather than directly
to Chiron’s end customers.
Product sales increased 18% to $222.6 million in 2004 from
$188.6 million in 2003. The $34.0 million increase was
principally the result of $16.4 million in higher blood
screening sales, both in the United States and international
markets, a $3.8 million increase in instrument sales, and a
$13.1 million increase in STD product sales, primarily
APTIMA. Blood screening sales represented $95.6 million, or
43% of product sales in 2004, compared to $76.6 million, or
41% of product sales, in 2003.
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We expect increased competitive pressures related to our STD and
blood screening products in the future, primarily as a result of
the introduction by others of competing products into both the
STD and blood screening markets, and continuing pricing pressure
as it relates to the STD market.
| Collaborative research revenue |
Collaborative research revenue decreased 5% in 2005 from 2004.
The $1.3 million decrease was primarily the result of a
$3.0 million decrease in revenue due to completion of
National Institutes of Health, or NIH, funding of our WNV assay
development work during 2004, partially offset by a
$0.5 million increase in revenue for reimbursement from
Chiron for WNV assay development costs and $1.3 million in
revenue for shipments of discriminatory HBV, or dHBV, assays and
TIGRIS instrument lease revenue from Chiron.
Collaborative research revenue increased 76% in 2004 from 2003.
The $11.7 million increase was primarily the result of a
$12.6 million increase in firm support commitment payments
in connection with the WNV assay tests provided to United States
customers through our collaboration with Chiron, and a
$1.4 million increase in revenue for reimbursement from
Chiron for WNV assay development costs. This increase was
partially offset by a $1.9 million decrease in revenue from
the NIH as our WNV assay funding was completed during 2004 and a
$1.2 million decrease in revenue for reimbursement from
Chiron of our development costs incurred on the Procleix Ultrio
assay.
Collaborative research revenue tends to fluctuate based on the
amount of research services performed, the status of projects
under collaboration and the achievement of milestones. Due to
the nature of our collaborative research revenues, results in
any one period are not necessarily indicative of results to be
achieved in the future. Our ability to generate additional
collaborative research revenues depends, in part, on our ability
to initiate and maintain relationships with potential and
current collaborative partners. These relationships may not be
established or maintained and current collaborative research
revenue may decline. In the event of FDA approval of our
Procleix Ultrio assay, we would expect Chiron to implement
commercial pricing related to the use of this product in the
United States, which would result in an increase in product
sales partially offset by a decrease in collaborative research
revenue.
| Royalty and license revenue |
Royalty and license revenue decreased 58% in 2005 from 2004. The
$11.5 million decrease in royalty and license revenue
during 2005 was principally attributed to
(i) $7.0 million in license fees earned from Tosoh in
2004 as part of our non-exclusive licensing agreement relating
to NAT technologies effective in January 2004, (ii) a
$6.5 million milestone payment from Chiron in 2004 as we
began clinical trial testing of the Procleix Ultrio assay on our
TIGRIS instrument in the United States, effective in the first
quarter of 2004, and (iii) a $3.2 million decrease in
net license income from Bayer for the licensing of rights to
certain patented technology. These decreases were partially
offset by a $3.9 million increase in license fee revenue
recognized from bioMérieux’s affiliates in 2005, which
was based on the selection of targets pursuant to the terms of
our September 2004 agreement with bioMérieux, and a
$1.4 million increase in our share of royalties from Chiron
based upon Chiron’s agreement with Laboratory Corporation
of America for use of Chiron’s HCV intellectual property
for NAT used in screening plasma donations in the United States.
Royalty and license revenue increased 525% in 2004 from 2003.
The $16.8 million increase was principally attributed to
(i) $7.0 million in license fees earned from Tosoh as
part of our non-exclusive licensing agreement relating to NAT
technologies effective in January 2004, and (ii) a
$6.5 million milestone payment from Chiron as we began
clinical trial testing of the Procleix Ultrio assay on our
TIGRIS instrument in the United States. Further, we recognized
$3.2 million of license revenue from Bayer during 2004 for
the licensing of rights to certain patented technology.
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.
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| Cost of product sales |
Cost of product sales increased 40% in 2005 from 2004. The
$24.0 million increase was principally attributed to
increased sales of TIGRIS instruments and spare parts to Chiron
($11.9 million), higher blood screening shipments to
international markets ($7.9 million), higher APTIMA
shipments ($3.0 million) and the amortization of
capitalized software development costs ($0.8 million)
related to our TIGRIS instrument, which began in the second
quarter of 2004.
Cost of product sales increased 32% in 2004 from 2003. The
$14.4 million increase was principally attributed to higher
product shipments ($8.5 million), higher allowances for
scrap expense ($4.4 million) and the amortization of
capitalized software development costs ($1.7 million)
related to our TIGRIS instrument, which began in the second
quarter of 2004.
Our gross profit margin as a percentage of product sales
decreased to 69% in 2005, from 73% in 2004 and 76% in 2003. The
decrease in gross profit margin percentage in 2005 from 2004 was
principally attributed to increased sales of lower margin
products, including TIGRIS instruments and spare parts, higher
international sales of blood screening products, which generally
have had lower margin rates than domestic sales, and the
amortization of capitalized software development costs, which
began in the second quarter of 2004. The 2004 percentage
decrease from 2003 was primarily the result of higher scrap
expense, including expiration of enzymes that were produced in
support of the Procleix Ultrio assay BLA, increased sales of
lower margin products (including TIGRIS instruments), and the
amortization of capitalized software development costs, which
began in the second quarter of 2004, partially offset by lower
unit costs on sales volume increases.
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 requirements for smaller pool sizes or
ultimately individual donor testing of blood samples, if and
when implemented, could result in lower gross margin
percentages, as additional tests would be required to deliver
the sample results, unless a corresponding increase in sales
pricing structure is implemented. We are not able to accurately
predict the timing and extent to which our gross margin
percentage may be negatively affected as a result of smaller
pool sizes or individual donor testing because we do not know
the ultimate selling price that Chiron, our distributor, would
charge to the end user if smaller pool sizes or individual donor
testing were implemented. In general, international pool sizes
are smaller than domestic pool sizes and, therefore, growth in
blood screening revenues attributed to international expansion
may lead to lower gross margin percentages.
| Research and development |
Our R&D expenses include salaries and other
personnel-related expenses, temporary personnel, outside
services, laboratory and manufacturing supplies, pre-commercial
development lots and clinical evaluation trials. R&D
expenses increased 5% in 2005 from 2004. The $3.4 million
increase was primarily due to higher staffing levels to support
development projects, such as prostate cancer and HPV
($7.0 million), and an increase in development lot
production ($1.6 million), partially offset by reductions
in clinical trials for blood screening products
($3.0 million), outside services related to TIGRIS
instrument development costs ($1.5 million), and lab
supplies ($0.4 million).
R&D expenses increased 8% in 2004 from 2003. The
$4.9 million increase was primarily due to higher staffing
levels to support product development projects and clinical
trial efforts ($9.0 million), an increase in clinical
trials for blood screening products ($2.2 million), an
increase in outside development research due to our aggregate
license fees paid to DiagnoCure and AdnaGen AG
($1.6 million), and an increase in R&D expenses from
our subsidiary, Molecular Light Technology Limited, or MLT,
acquired in August 2003 ($1.2 million). These increases
were mostly offset by a $9.3 million decrease in
development lot production and lower per unit costs.
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| Marketing and sales |
Our marketing and sales expenses include personnel costs,
promotional expenses, and outside services. Marketing and sales
expenses increased 14% in 2005 from 2004. The $3.9 million
increase was primarily due to a $3.2 million increase in
salaries, benefits, commissions and other personnel related
costs in our marketing, sales, and technical service
organization, together with a $0.6 million increase in
spending for market research and industry conventions to help
support the TIGRIS instrument and to assess new market
opportunities, such as prostate cancer and HPV.
Marketing and sales expenses increased 20% in 2004 from 2003.
The $4.6 million increase was primarily due to a
$3.7 million increase in salaries, benefits, commissions
and other personnel related costs in our marketing, sales, and
technical service organization in order to support APTIMA market
expansion and TIGRIS instrument commercialization, and a
$0.6 million increase for advertising and promotional costs
related to the marketing launch of our TIGRIS instrument.
| General and administrative |
Our general and administrative, or G&A, expenses include
personnel costs for finance, legal, strategic planning and
business development, public relations and human resources, as
well as professional fees, such as expenses for legal, patents
and auditing services. G&A expenses increased 2% in 2005
from 2004. The $0.5 million increase was primarily the
result of a $1.4 million increase in salaries, benefits and
other personnel related expenses, and a $0.7 million
increase in recruiting and relocation fees. These increases were
partially offset by a $1.6 million decrease in spending on
professional fees as the costs associated with the Bayer
arbitration decreased.
G&A expenses increased 36% in 2004 from 2003. The
$8.4 million increase was primarily the result of a
$3.0 million increase in salaries, benefits and other
expenses resulting from higher staffing levels, including
$1.0 million in expenses from our majority owned
subsidiary, MLT; a $3.6 million increase in patent and
legal related expenses, including the costs of our ongoing
arbitration with Bayer; and a $0.7 million non-cash
compensation charge related to the departure of a former
executive.
| Total other income, net |
Total other income, net, generally consists of investment and
interest income offset by miscellaneous expense, minority
interest, and other items. The $2.6 million net increase in
2005 from 2004 was primarily due to an increase in interest
income resulting from higher average balances of our short-term
investments and higher yields on our investment portfolio.
The $0.7 million net decrease in total other income in 2004
from 2003 was primarily due to a $0.5 million increase in
realized foreign exchange rate losses.
| Income tax expense |
Income tax expense increased 5% in 2005 from 2004 to 34.5% of
2005 pretax income, compared to 35.5% of 2004 pretax income. The
decrease in our effective tax rate in 2005 was principally
attributed to increased tax-exempt interest income in our
investment portfolio and the new tax deduction on qualified
production activities provided by the American Jobs Creation Act
of 2004.
Income tax expense increased 52% in 2004 from 2003, to 35.5% of
2004 pretax income, compared to 35.9% of 2003 pretax income. The
slight decrease in our effective tax rate in 2004 was
principally attributed to an increase in tax-exempt interest
income, partially offset by higher profits taxed at the combined
federal and state statutory tax rate of approximately 41%.
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Liquidity and capital resources
| Amount | ||||||||||||||||||
| Change From | ||||||||||||||||||
| 2005 | 2004 | 2003 | 2004 to 2005 | |||||||||||||||
| (In thousands) | ||||||||||||||||||
|
December 31:
|
||||||||||||||||||
|
Cash, cash equivalents and short-term investments
|
$ | 220,288 | $ | 193,826 | $ | 156,306 | $ | 26,462 | ||||||||||
|
Working capital
|
262,659 | 234,202 | 169,000 | 28,457 | ||||||||||||||
|
Current ratio
|
6:1 | 8:1 | 5:1 | — | ||||||||||||||
|
Year Ended December 31:
|
||||||||||||||||||
|
Cash provided by (used in):
|
||||||||||||||||||
|
Operating activities
|
$ | 85,860 | $ | 62,284 | $ | 52,616 | $ | 23,576 | ||||||||||
|
Investing activities
|
(97,103 | ) | (93,712 | ) | (74,787 | ) | (3,391 | ) | ||||||||||
|
Financing activities
|
18,696 | 20,438 | 14,888 | (1,742 | ) | |||||||||||||
|
Purchases of property, plant and equipment (included in
investing activities above)
|
(45,386 | ) | (26,021 | ) | (12,238 | ) | (19,365 | ) | ||||||||||
Historically, we have financed our operations through cash from
operations, cash received from collaborative research
agreements, royalty and license fees, and cash from capital
contributions. At December 31, 2005, we had
$220.3 million of cash and cash equivalents and short-term
investments.
The $23.6 million increase in net cash provided by
operating activities during 2005 from 2004 included a
$4.7 million growth in net current and deferred income
taxes payable, a $5.5 million increase in net income, a
$9.9 million increase in accounts payable, a
$4.6 million decrease in net inventory purchases, and a
$4.4 million increase in depreciation and amortization;
partially offset by a $5.4 million decrease in stock option
income tax benefits. The accounts payable change was attributed
to acceleration of payments to our vendors in December 2004,
immediately prior to our implementation of a new Enterprise
Resource Planning, or ERP, software system. The increase in
depreciation and amortization was primarily due to amortization
on additional technology and software licenses that were
purchased, along with the amortization of capitalized software
development costs, which began in the second quarter of 2004.
The decrease in net inventory purchases in 2005 from 2004 was
attributed to the 2004 commercialization of our TIGRIS
instrument and the European launch of the Procleix Ultrio assay.
The $3.4 million increase in our investing activities
during 2005 included a $19.4 million increase in capital
expenditures and a $6.8 million increase in purchases of
various manufacturing, license and access fess, including a
$20.0 million manufacturing fee paid to Roche. Further,
during 2005, we paid $1.5 million plus accrued interest to
acquire the remaining outstanding shares of MLT and
$2.5 million for preferred shares of Molecular Profiling
Institute, Inc. These increases were partially offset by a
$26.6 million decrease in purchases (net of sales) of
short-term investments. Our 2005 growth in capital expenditures
was primarily due to the construction of our new building and
costs of our ERP system implementation. Our expenditures for
capital additions vary based on the stage of certain development
projects and may increase in the future related to the timing of
development of new product opportunities and to support
expansion of our facilities in connection with those
opportunities. We expect capital expenditures in 2006 to
approximate 2005 spending.
The $1.7 million decrease in net cash provided by financing
activities during 2005 from 2004 was principally attributed to a
$0.8 million decrease in employee purchases of our common
stock made through our Employee Stock Purchase Plan, or ESPP,
and a $0.9 million decrease in proceeds from the exercise
of stock options. On a going-forward basis, cash from financing
activities will be affected by proceeds from the exercise of
stock options and receipts from sales of stock under our ESPP.
We expect fluctuations to occur throughout the year, as the
amount and frequency of stock-related transactions are dependent
upon the market performance of our common stock, along with
other factors.
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We have an unsecured bank line of credit agreement with Wells
Fargo Bank, N.A., which expires in July 2007, 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%. We have not taken advances against the line of credit
since its inception. The line of credit agreement requires us to
comply with various financial and restrictive covenants. As of
December 31, 2005, we were in compliance with all covenants.
In July 2004, we commenced construction of an additional
building to expand our main San Diego campus. This new
building will consist of an approximately 291,000 square
foot outside shell, with approximately 190,000 square feet
built-out with interior improvements. The additional space that
will not initially be built-out will allow for future expansion.
The first phase of this project is currently estimated to cost
approximately $44.4 million, of which $32.1 million
was capitalized to construction in-progress as of
December 31, 2005. These costs are being capitalized as
incurred and depreciation will commence upon our completion and
use of the building, which is planned for mid 2006.
We implemented a new ERP system that cost approximately
$4.9 million in 2004. We incurred $3.3 million in
additional costs during 2005 and expect to incur approximately
$1.0 to $2.0 million of costs in 2006 for further
enhancements to our ERP system.
| Contractual obligations and commercial commitments |
Our contractual obligations due to lessors for properties that
we lease, as well as amounts due for purchase commitments and
collaborative agreements as of December 31, 2005 were as
follows (in thousands):
| Total | 2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | ||||||||||||||||||||||
|
Operating
leases(1)
|
$ | 3,165 | $ | 2,065 | $ | 863 | $ | 167 | $ | 70 | $ | — | $ | — | ||||||||||||||
|
Material purchase
commitments(2)
|
22,582 | 22,582 | — | — | — | — | — | |||||||||||||||||||||
|
Collaborative
commitments(3)
|
19,900 | 6,500 | 2,650 | 10,000 | 750 | — | — | |||||||||||||||||||||
|
Total(4)
|
$ | 45,647 | $ | 31,147 | $ | 3,513 | $ | 10,167 | $ | 820 | $ | — | $ | — | ||||||||||||||
| (1) | Reflects obligations on facilities under operating leases in place as of December 31, 2005. Future minimum lease payments are included in the table above. |
| (2) | Amounts represent our minimum purchase commitments from two key vendors for TIGRIS instruments and raw materials used in manufacturing. Of the $14.4 million expected to be purchased for TIGRIS instruments, we anticipate that approximately $9.3 million will be reimbursed by Chiron. |
| (3) | In addition to the minimum payments due under our collaborative agreements, we may be required to pay up to $4.25 million in milestone payments, plus royalties on net sales of any products using specified technology. Further, if we exercise our option to develop a point of sample NAT instrument, we are required to purchase an equity interest in Qualigen for approximately $7.0 million and we may pay up to $3.0 million based on development milestones. |
| (4) | Does not include amounts relating to our obligations under our collaboration with Chiron, pursuant to which both parties have obligations to each other. We are obligated to manufacture and supply our blood screening assay to Chiron, and Chiron 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 Chiron intends to take delivery, and certain quantities specified on a rolling 12-month forecast. |
As discussed in Note 12 to the Consolidated Financial
Statements, we have long-term liabilities for deferred employee
compensation. The payments related to the deferred compensation
are not included in the table above since they are dependent
upon when certain key employees retire or otherwise leave the
Company.
Our primary short-term needs for capital, which are subject to
change, are for expansion of our San Diego campus,
continued research and development of new products, costs
related to commercialization of blood screening products and
purchases of the TIGRIS instrument for placement with our
customers. Certain research and development costs may be funded
under collaboration agreements with partners.
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We believe that our available cash balances, anticipated cash
flows from operations and 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 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.
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.
Stock Options
| Option program description |
Our stock option program is a broad-based, long-term retention
program that is intended to attract and retain talented
employees and to align stockholder and employee interests. Our
primary program consists of a broad-based plan under which stock
options are granted to employees and directors. Substantially
all of our employees have historically participated in our stock
option program.
Additional information regarding our stock option plans for
2005, 2004 and 2003 is provided in our consolidated financial
statements. See “Notes to Consolidated Financial
Statements, Note 8 — Stockholders’
Equity.”
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| General option and equity compensation plan information |
Summary of Option and Restricted Stock Activity
(Shares in thousands)
| Options Outstanding | ||||||||||||||||||||
| Shares | ||||||||||||||||||||
| Remaining | Number of | Weighted | ||||||||||||||||||
| Available | Shares to be | Average | Restricted | Director | ||||||||||||||||
| for Future | Issued Upon | Exercise | Stock | Stock | ||||||||||||||||
| Issuance | Exercise | Price | Awards | Purchases | ||||||||||||||||
|
December 31, 2003
|
3,647 | 5,473 | $ | 18.10 | 20 | — | ||||||||||||||
|
Grants
|
(2,084 | ) | 2,061 | 37.21 | 20 | 3 | ||||||||||||||
|
Exercises
|
— | (1,178 | ) | 14.15 | — | (3 | ) | |||||||||||||
|
Cancellations
|
352 | (352 | ) | 24.97 | — | — | ||||||||||||||
|
December 31, 2004
|
1,915 | 6,004 | $ | 25.03 | 40 | — | ||||||||||||||
|
Grants
|
(1,363 | ) | 1,228 | 43.82 | 132 | 3 | ||||||||||||||
|
Exercises
|
— | (890 | ) | 17.65 | — | (3 | ) | |||||||||||||
|
Cancellations
|
388 | (388 | ) | 32.78 | — | — | ||||||||||||||
|
December 31, 2005
|
940 | 5,954 | $ | 29.53 | 172 | * | — | |||||||||||||
| * | Includes 60,000 shares of Deferred Issuance Restricted Stock and 112,000 shares of Restricted Stock as of December 31, 2005. |
In-the-Money and
Out-of-the-Money Option
Information
(Shares in thousands)
| Exercisable | Unexercisable | Total | ||||||||||||||||||||||
| Wtd. | Wtd. | Wtd. | ||||||||||||||||||||||
| Avg. | Avg. | Avg | ||||||||||||||||||||||
| Exercise | Exercise | Exercise | ||||||||||||||||||||||
| As of December 31, 2005 | Shares | Price | Shares | Price | Shares | Price | ||||||||||||||||||
|
In-the-Money
|
2,940 | $ | 22.35 | 2,840 | $ | 35.74 | 5,780 | $ | 28.93 | |||||||||||||||
|
Out-of-the
Money(1)
|
— | — | 174 | 49.36 | 174 | 49.36 | ||||||||||||||||||
|
Total Options Outstanding
|
2,940 | 3,014 | 5,954 | |||||||||||||||||||||
| (1) | Out-of-the-money options are those options with an exercise price equal to or greater than the fair market value of our common stock, $48.79, at the close of business on December 30, 2005. |
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
Our exposure to market risk for changes in interest rates
relates primarily to the increase or decrease in the amount of
interest income we can earn on our investment portfolio. Our
risk associated with fluctuating interest income is limited to
our investments in interest rate sensitive financial
instruments. Under our current policies, we do not use interest
rate derivative instruments to manage this exposure to interest
rate changes. We seek to ensure the safety and preservation of
our invested principal by limiting default risk, market risk,
and reinvestment risk. We mitigate default risk by investing in
short-term investment grade securities. A 100 basis point
increase or decrease in interest rates would increase or
decrease our current investment balance by approximately
$3.0 million annually. 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.
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Table of Contents
| 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 currencies of our wholly owned subsidiaries is the
British pound. Accordingly, the accounts of these operations are
translated from the local currency 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.
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
December 31, 2005 were not material. Under our
collaboration agreement with Chiron, 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 Chiron’s 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 2005, a 10% movement of currency
exchange rates would result in a blood screening product sales
increase or decrease of approximately $3.3 million. We
believe that our business operations are not exposed to market
risk relating to commodity price risk.
| Item 8. | Financial Statements and Supplementary Data |
Our consolidated financial statements and the Reports of
Ernst & Young LLP, our Independent Registered Public
Accounting Firm, are included in this Annual Report on
Form 10-K on pages
F-1 through F-31.
| Item 9. | Changes in and Disagreements with Independent Registered Public Accounting Firm on Accounting and Financial Disclosure |
None.
| Item 9A. | Controls and Procedures |
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the 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, management
recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable and not
absolute assurance of achieving the desired control objectives.
In reaching a reasonable level of assurance, management
necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
In addition, the design of any system of controls also is based
in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions; over time, a control may become inadequate because
of changes in conditions, or the degree of compliance with
policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.
Conclusion Regarding the Effectiveness of Disclosure Controls
and Procedures
As of the end of the period covered by this Annual Report on
Form 10-K, we
carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures,
as defined in
Rules 13a-15(e)
and 15d-15(e) under the
Securities Exchange Act of 1934, as
76
Table of Contents
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 2005.
Changes in Internal Control Over Financial Reporting
An evaluation was also performed under the supervision and with
the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of any change in
our internal control over financial reporting that occurred
during our last fiscal quarter and that has materially affected,
or is reasonably likely to materially affect, our internal
control over financial reporting. That evaluation did not
identify any change in our internal control over financial
reporting that occurred during our latest fiscal quarter and
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rules 13a-15(f).
All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
as of December 31, 2005 based on the framework in
Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on our evaluation under the framework
in Internal Control — Integrated Framework, our
management concluded that our internal control over financial
reporting was effective as of December 31, 2005.
Our management’s assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2005 has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as
stated in their report which is included herein.
77
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Gen-Probe Incorporated
We have audited management’s assessment, included in the
accompanying Management’s Report on Internal Control Over
Financial Reporting, that Gen-Probe Incorporated maintained
effective internal control over financial reporting as of
December 31, 2005, based on criteria established in
Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Gen-Probe Incorporated’s management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on management’s assessment and an
opinion on the effectiveness of the company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Gen-Probe
Incorporated maintained effective internal control over
financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on the COSO criteria.
Also, in our opinion, Gen-Probe Incorporated maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2005, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Gen-Probe Incorporated as of
December 31, 2005 and 2004, and the related consolidated
statements of income, cash flows and stockholders’ equity
for each of the three years in the period ended
December 31, 2005 of Gen-Probe Incorporated and our report
dated February 9, 2006 expressed an unqualified opinion
thereon.
| /s/ Ernst & Young LLP |
San Diego, California
February 9, 2006
78
Table of Contents
| Item 9B. | Other Information |
None.
PART III
| Item 10. | Directors and Executive Officers of the Registrant |
The information required by this Item will be set forth in the
section headed “Proposal 1 — Election of
Directors” and the section headed “Executive
Compensation and Other Information” in our definitive Proxy
Statement to be filed with the Securities and Exchange
Commission in connection with the Annual Meeting of our
Stockholders (the “Proxy Statement”), to be held in
2006, and is incorporated in this report by reference.
We have adopted a code of ethics for directors, officers
(including our principal executive officer, principal financial
officer and principal accounting officer) and employees, known
as the Code of Ethics. The Code of Ethics is available on our
website at http://www.gen-probe.com. Stockholders may request a
free copy of the Code of Ethics from:
| Gen-Probe Incorporated | |
| Attention: Investor Relations | |
| 10210 Genetic Center Drive | |
| San Diego, CA 92121-4362 | |
| (858) 410-8000 | |
| http://www.gen-probe.com |
| Item 11. | Executive Compensation |
The information required by this Item will be set forth in the
section headed “Executive Compensation and Other
Information” and the section headed “Security
Ownership of Certain Beneficial Owners and Management” in
the Proxy Statement and is incorporated in this report by
reference.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this Item will be set forth in the
section headed “Security Ownership of Certain Beneficial
Owners and Management” and the section headed
“Executive Compensation and Other Information” in the
Proxy Statement and is incorporated in this report by reference.
Information regarding our equity compensation plans, is set
forth in Item 7 of this report, entitled
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations, Stock Options —
General option and equity compensation plan information”,
and will be set forth in the section entitled “Executive
Compensation — Equity Compensation Plan
Information” in our Proxy Statement and is incorporated in
this report by reference.
| Item 13. | Certain Relationships and Related Transactions |
The information required by this Item will be set forth in the
section headed “Certain Transactions” in the Proxy
Statement and is incorporated in this report by reference.
| Item 14. | Principal Accountant Fees and Services |
The information required by this Item will be set forth in the
section headed “Independent Registered Public Accounting
Firm Fees” in the Proxy Statement, and is incorporated in
this report by reference.
79
Table of Contents
PART IV
| Item 15. | Exhibits and Financial Statement Schedules |
(a) Documents filed as part of this report.
| 1. The following financial statements of Gen-Probe Incorporated and Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm, are included in this report: |
| Report of Independent Registered Public Accounting Firm | |
| Consolidated balance sheets at December 31, 2005 and 2004 | |
| Consolidated statements of income for each of the three years in the period ended December 31, 2005 | |
| Consolidated statements of cash flows for each of the three years in the period ended December 31, 2005 | |
| Consolidated statements of stockholders’ equity for each of the three years in the period ended December 31, 2005 | |
| Notes to consolidated financial statements |
| 2. Schedule II — Valuation and Qualifying Accounts and Reserves for each of the three years in the period ended December 31, 2005 |
| Financial Statement schedules. All other schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or notes thereto. |
| 3. List of Exhibits required by Item 601 of Regulation S-K. |
(b) Exhibits. See the Exhibit Index and
Exhibits filed as part of this report.
80
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned
thereunto duly authorized.
| GEN-PROBE INCORPORATED |
| By: | /s/ Henry L. Nordhoff |
|
|
|
| Henry L. Nordhoff | |
| Chairman, President and Chief Executive Officer |
Date: March 10, 2006
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
| Signature | Title | Date | ||||
|
/s/ Henry L. Nordhoff Henry L. Nordhoff |
Chairman, President and Chief Executive Officer (Principal Executive Officer) |
March 10, 2006 | ||||
|
/s/ Herm Rosenman Herm Rosenman |
Vice President — Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
March 10, 2006 | ||||
|
/s/ John W. Brown John W. Brown |
Director | March 10, 2006 | ||||
|
/s/ Raymond V.
Dittamore Raymond V. Dittamore |
Director | March 10, 2006 | ||||
|
/s/ Mae C. Jemison, M.D Mae C. Jemison, M.D |
Director | March 10, 2006 | ||||
|
/s/ Armin M. Kessler Armin M. Kessler |
Director | March 10, 2006 | ||||
|
/s/ Gerald D.
Laubach, Ph.D. Gerald D. Laubach, Ph.D. |
Director | March 10, 2006 | ||||
|
/s/ Brian A. McNamee,
M.B.B.S Brian A. McNamee, M.B.B.S |
Director | March 10, 2006 | ||||
|
/s/ Phillip M.
Schneider Phillip M. Schneider |
Director | March 10, 2006 | ||||
|
/s/ Abraham D. Sofaer Abraham D. Sofaer |
Director | March 10, 2006 | ||||
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GEN-PROBE INCORPORATED
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
| Page | ||||
| F-2 | ||||
| F-3 | ||||
| F-4 | ||||
| F-5 | ||||
| F-6 | ||||
| F-7 | ||||
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Gen-Probe Incorporated
We have audited the accompanying consolidated balance sheets of
Gen-Probe Incorporated as of December 31, 2005 and 2004,
and the related consolidated statements of income, cash flows
and stockholders’ equity for each of the three years in the
period ended December 31, 2005. Our audits also included
the financial statement schedule listed in the Index at
Item 15(a). These financial statements and schedule are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Gen-Probe Incorporated at
December 31, 2005 and 2004, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2005, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Gen-Probe Incorporated’s internal control
over financial reporting as of December 31, 2005, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated February 9,
2006 expressed an unqualified opinion thereon.
| /s/ Ernst & Young LLP |
San Diego, California
February 9, 2006
F-2
Table of Contents
GEN-PROBE INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| December 31 | |||||||||
| 2005 | 2004 | ||||||||
| ASSETS | |||||||||
|
Current assets:
|
|||||||||
|
Cash and cash equivalents
|
$ | 32,328 | $ | 25,498 | |||||
|
Short-term investments
|
187,960 | 168,328 | |||||||
|
Trade accounts receivable, net of allowance for doubtful
accounts of $790 and $664 at December 31, 2005 and 2004,
respectively
|
31,930 | 21,990 | |||||||
|
Accounts receivable — other
|
1,924 | 3,136 | |||||||
|
Inventories
|
36,342 | 27,308 | |||||||
|
Deferred income taxes
|
10,389 | 7,725 | |||||||
|
Prepaid expenses
|
10,768 | 8,517 | |||||||
|
Other current assets
|
4,184 | 5,447 | |||||||
|
Total current assets
|
315,825 | 267,949 | |||||||
|
Property, plant and equipment, net
|
105,190 | 76,651 | |||||||
|
Capitalized software
|
20,952 | 23,466 | |||||||
|
Goodwill
|
18,621 | 18,621 | |||||||
|
License, manufacturing access fees and other assets
|
49,648 | 24,395 | |||||||
|
Total assets
|
$ | 510,236 | $ | 411,082 | |||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||
|
Current liabilities:
|
|||||||||
|
Accounts payable
|
14,029 | 6,729 | |||||||
|
Accrued salaries and employee benefits
|
14,910 | 11,912 | |||||||
|
Other accrued expenses
|
3,264 | 4,451 | |||||||
|
Income tax payable
|
13,192 | 1,188 | |||||||
|
Deferred revenue
|
7,771 | 9,467 | |||||||
|
Total current liabilities
|
53,166 | 33,747 | |||||||
|
Deferred income taxes
|
5,124 | 9,187 | |||||||
|
Deferred revenue
|
4,333 | 5,000 | |||||||
|
Deferred rent
|
240 | 309 | |||||||
|
Minority interest
|
— | 1,810 | |||||||
|
Commitments and contingencies
|
|||||||||
|
Stockholders’ equity:
|
|||||||||
|
Preferred stock, $.0001 par value per share;
20,000,000 shares authorized, none issued and outstanding
|
— | — | |||||||
|
Common stock, $.0001 par value per share;
200,000,000 shares authorized, 51,137,541 and
50,035,490 shares issued and outstanding at
December 31, 2005 and 2004, respectively
|
5 | 5 | |||||||
|
Additional paid-in capital
|
281,907 | 248,767 | |||||||
|
Deferred compensation
|
(5,951 | ) | (1,104 | ) | |||||
|
Accumulated other comprehensive (loss) income
|
(1,231 | ) | 807 | ||||||
|
Retained earnings
|
172,643 | 112,554 | |||||||
|
Total stockholders’ equity
|
447,373 | 361,029 | |||||||
|
Total liabilities and stockholders’ equity
|
$ | 510,236 | $ | 411,082 | |||||
See accompanying notes to consolidated financial statements.
F-3
Table of Contents
GEN-PROBE INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
| Years Ended December 31 | |||||||||||||
| 2005 | 2004 | 2003 | |||||||||||
|
Revenues:
|
|||||||||||||
|
Product sales
|
$ | 271,650 | $ | 222,560 | $ | 188,645 | |||||||
|
Collaborative research revenue
|
25,843 | 27,122 | 15,402 | ||||||||||
|
Royalty and license revenue
|
8,472 | 20,025 | 3,144 | ||||||||||
|
Total revenues
|
305,965 | 269,707 | 207,191 | ||||||||||
|
Operating expenses:
|
|||||||||||||
|
Cost of product sales
|
83,900 | 59,908 | 45,458 | ||||||||||
|
Research and development
|
71,846 | 68,482 | 63,565 | ||||||||||
|
Marketing and sales
|
31,145 | 27,191 | 22,586 | ||||||||||
|
General and administrative
|
32,107 | 31,628 | 23,233 | ||||||||||
|
Total operating expenses
|
218,998 | 187,209 | 154,842 | ||||||||||
|
Income from operations
|
86,967 | 82,498 | 52,349 | ||||||||||
|
Total other income, net
|
4,727 | 2,081 | 2,747 | ||||||||||
|
Income before income taxes
|
91,694 | 84,579 | 55,096 | ||||||||||
|
Income tax expense
|
31,605 | 30,004 | 19,766 | ||||||||||
|
Net income
|
$ | 60,089 | $ | 54,575 | $ | 35,330 | |||||||
|
Net income per share:
|
|||||||||||||
|
Basic
|
$ | 1.19 | $ | 1.10 | $ | 0.74 | |||||||
|
Diluted
|
$ | 1.15 | $ | 1.06 | $ | 0.72 | |||||||
|
Weighted average shares outstanding:
|
|||||||||||||
|
Basic
|
50,617 | 49,429 | 47,974 | ||||||||||
|
Diluted
|
52,445 | 51,403 | 49,137 | ||||||||||
See accompanying notes to consolidated financial statements.
F-4
Table of Contents
GEN-PROBE INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Years Ended December 31 | ||||||||||||||
| 2005 | 2004 | 2003 | ||||||||||||
|
Operating activities
|
||||||||||||||
|
Net income
|
$ | 60,089 | $ | 54,575 | $ | 35,330 | ||||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||||
|
Depreciation and amortization
|
22,606 | 18,239 | 15,822 | |||||||||||
|
Stock compensation charges
|
920 | 1,142 | 149 | |||||||||||
|
Loss on disposal of property and equipment
|
399 | 377 | 102 | |||||||||||
|
Stock option income tax benefits
|
8,677 | 14,035 | 4,387 | |||||||||||
|
Changes in assets and liabilities:
|
||||||||||||||
|
Accounts receivable
|
(8,937 | ) | (6,774 | ) | (2,164 | ) | ||||||||
|
Inventories
|
(9,048 | ) | (13,621 | ) | (688 | ) | ||||||||
|
Prepaid expenses
|
(2,251 | ) | (1,428 | ) | (2,626 | ) | ||||||||
|
Other current assets
|
1,263 | (2,333 | ) | (2,463 | ) | |||||||||
|
Accounts payable
|
7,329 | (2,535 | ) | 310 | ||||||||||
|
Accrued salaries and employee benefits
|
2,998 | 242 | 2,710 | |||||||||||
|
Other accrued expenses
|
(1,089 | ) | (2,329 | ) | (259 | ) | ||||||||
|
Income tax payable
|
12,053 | (4,965 | ) | 5,297 | ||||||||||
|
Deferred revenue
|
(2,363 | ) | 2,119 | (1,085 | ) | |||||||||
|
Deferred income taxes
|
(6,717 | ) | 5,567 | (2,239 | ) | |||||||||
|
Deferred rent
|
(69 | ) | (14 | ) | (4 | ) | ||||||||
|
Minority interest
|
— | (13 | ) | 37 | ||||||||||
|
Net cash provided by operating activities
|
85,860 | 62,284 | 52,616 | |||||||||||
|
Investing activities
|
||||||||||||||
|
Proceeds from sales and maturities of short-term investments
|
116,907 | 159,301 | 42,722 | |||||||||||
|
Purchases of short-term investments
|
(137,841 | ) | (206,822 | ) | (95,421 | ) | ||||||||
|
Cash paid for acquisition of Molecular Light Technology Limited
|
(1,539 | ) | (376 | ) | (4,133 | ) | ||||||||
|
Purchases of property, plant and equipment
|
(45,386 | ) | (26,021 | ) | (12,238 | ) | ||||||||
|
Capitalization of intangible assets, including license,
manufacturing access fees
|
(29,117 | ) | (19,836 | ) | (5,705 | ) | ||||||||
|
Other assets
|
(127 | ) | 42 | (12 | ) | |||||||||
|
Net cash used in investing activities
|
(97,103 | ) | (93,712 | ) | (74,787 | ) | ||||||||
|
Financing activities
|
||||||||||||||
|
Proceeds from issuance of common stock
|
18,696 | 20,438 | 14,888 | |||||||||||
|
Net cash provided by financing activities
|
18,696 | 20,438 | 14,888 | |||||||||||
|
Effect of exchange rate changes on cash and cash equivalents
|
(623 | ) | 515 | 138 | ||||||||||
|
Net increase (decrease) in cash and cash equivalents
|
6,830 | (10,475 | ) | (7,145 | ) | |||||||||
|
Cash and cash equivalents at the beginning of year
|
25,498 | 35,973 | 43,118 | |||||||||||
|
Cash and cash equivalents at the end of year
|
$ | 32,328 | $ | 25,498 | $ | 35,973 | ||||||||
|
Supplemental disclosure of cash flow information:
|
||||||||||||||
|
Cash paid for:
|
||||||||||||||
|
Interest
|
$ | 162 | $ | 34 | $ | 63 | ||||||||
|
Income taxes
|
$ | 16,807 | $ | 16,030 | $ | 11,913 | ||||||||
See accompanying notes to consolidated financial statements.
F-5
Table of Contents
GEN-PROBE INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
| Accumulated | |||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||
| Common Stock | Additional | Comprehensive | Total | ||||||||||||||||||||||||||
| Paid-In | Deferred | (Loss) | Retained | Stockholders’ | |||||||||||||||||||||||||
| Shares | Amount | Capital | Compensation | Income | Earnings | Equity | |||||||||||||||||||||||
|
Balance at December 31, 2002
|
47,600 | 5 | 192,624 | — | 300 | 22,649 | 215,578 | ||||||||||||||||||||||
|
Common shares issued from exercise of stock options
|
1,083 | — | 14,301 | — | — | — | 14,301 | ||||||||||||||||||||||
|
Purchase of common shares through employee stock purchase plan
|
35 | — | 587 | — | — | — | 587 | ||||||||||||||||||||||
|
Issuance of common shares to board members
|
4 | — | 87 | — | — | — | 87 | ||||||||||||||||||||||
|
Deferred compensation related to grant of restricted stock awards
|
— | — | 600 | (600 | ) | — | — | — | |||||||||||||||||||||
|
Amortization of deferred compensation
|
— | — | — | 62 | — | — | 62 | ||||||||||||||||||||||
|
Stock option income tax benefits
|
— | — | 4,387 | — | — | — | 4,387 | ||||||||||||||||||||||
|
Comprehensive income:
|
|||||||||||||||||||||||||||||
|
Net income
|
— | — | — | — | — | 35,330 | 35,330 | ||||||||||||||||||||||
|
Unrealized gains on short-term investments, net of income tax
expense of $61
|
— | — | — | — | 43 | — | 43 | ||||||||||||||||||||||
|
Comprehensive income
|
35,373 | ||||||||||||||||||||||||||||
|
Balance at December 31, 2003
|
48,722 | 5 | 212,586 | (538 | ) | 343 | 57,979 | 270,375 | |||||||||||||||||||||
|
Common shares issued from exercise of stock options
|
1,178 | — | 16,672 | — | — | — | 16,672 | ||||||||||||||||||||||
|
Purchase of common shares through employee stock purchase plan
|
132 | — | 3,766 | — | — | — | 3,766 | ||||||||||||||||||||||
|
Issuance of common shares to board members
|
3 | — | 140 | — | — | — | 140 | ||||||||||||||||||||||
|
Deferred compensation related to grant of restricted stock awards
|
— | — | 839 | (839 | ) | — | — | — | |||||||||||||||||||||
|
Amortization of deferred compensation
|
— | — | — | 273 | — | — | 273 | ||||||||||||||||||||||
|
Stock option compensation expense for modification of stock
option awards
|
— | — | 729 | — | — | — | 729 | ||||||||||||||||||||||
|
Stock option income tax benefits
|
— | — | 14,035 | — | — | — | 14,035 | ||||||||||||||||||||||
|
Comprehensive income:
|
|||||||||||||||||||||||||||||
|
Net income
|
— | — | — | — | — | 54,575 | 54,575 | ||||||||||||||||||||||
|
Unrealized losses on short-term investments, net of income tax
benefits of $17
|
— | — | — | — | (313 | ) | — | (313 | ) | ||||||||||||||||||||
|
Foreign currency translation adjustment
|
— | — | — | — | 777 | — | 777 | ||||||||||||||||||||||
|
Comprehensive income
|
55,039 | ||||||||||||||||||||||||||||
|
Balance at December 31, 2004
|
50,035 | 5 | 248,767 | (1,104 | ) | 807 | 112,554 | 361,029 | |||||||||||||||||||||
|
Common shares issued from exercise of stock options
|
890 | — | 15,709 | — | — | — | 15,709 | ||||||||||||||||||||||
|
Purchase of common shares through employee stock purchase plan
|
97 | — | 2,987 | — | — | — | 2,987 | ||||||||||||||||||||||
|
Issuance of common shares to board members
|
4 | — | 136 | — | — | — | 136 | ||||||||||||||||||||||
|
Deferred compensation related to grant of restricted stock awards
|
112 | — | 5,631 | (5,631 | ) | — | — | — | |||||||||||||||||||||
|
Amortization of deferred compensation
|
— | — | — | 784 | — | — | 784 | ||||||||||||||||||||||
|
Stock option income tax benefits
|
— | — | 8,677 | — | — | — | 8,677 | ||||||||||||||||||||||
|
Comprehensive income:
|
|||||||||||||||||||||||||||||
|
Net income
|
— | — | — | — | — | 60,089 | 60,089 | ||||||||||||||||||||||
|
Unrealized losses on short-term investments, net of income tax
benefits of $496
|
— | — | — | — | (950 | ) | — | (950 | ) | ||||||||||||||||||||
|
Foreign currency translation adjustment
|
— | — | — | — | (1,088 | ) | — | (1,088 | ) | ||||||||||||||||||||
|
Comprehensive income
|
58,051 | ||||||||||||||||||||||||||||
|
Balance at December 31, 2005
|
51,138 | $ | 5 | $ | 281,907 | $ | (5,951 | ) | $ | (1,231 | ) | $ | 172,643 | $ | 447,373 | ||||||||||||||
See accompanying notes to consolidated financial statements.
F-6
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 1. | Organization and summary of significant accounting policies |
| Organization |
Gen-Probe Incorporated (“Gen-Probe” or the
“Company”) is engaged in developing, manufacturing and
marketing nucleic acid probe-based products used for the
clinical diagnosis of human diseases and screening donated human
blood. The Company also develops and manufactures nucleic acid
probe-based products for the detection of harmful organisms in
the environment and in industrial processes. Gen-Probe’s
principal customers are large reference laboratories, public
health laboratories and hospitals located in North America,
Europe and Japan.
In August 2003, the Company paid approximately $7,258,000 in
cash to acquire an additional 65.6% of the outstanding shares of
Molecular Light Technology Limited (“MLT”), a
privately held company located in Cardiff, Wales. In August
2004, the Company paid $376,000 plus accrued interest, in cash,
to acquire an additional 3.4% of the outstanding shares. In May
2005, the Company paid $1,539,000 plus accrued interest, in
cash, to acquire the remaining outstanding shares of MLT, giving
the Company 100% ownership. As such, the minority interest on
the balance sheet has been eliminated and all subsequent
earnings (losses) of this subsidiary are fully consolidated into
the Company’s consolidated financial statements.
| Principles of consolidation |
The consolidated financial statements of the Company include the
accounts of the Company and its subsidiaries, Gen-Probe Sales
and Services, Inc., Gen-Probe UK Limited (“GP UK
Limited”) and MLT and its subsidiaries. MLT and its
subsidiaries are consolidated into the Company’s financial
statements one month in arrears. All intercompany transactions
and balances have been eliminated in consolidation.
| Use of estimates |
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
(“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 inventories and long-lived assets, including
capitalized software, manufacturing and license fees, and income
taxes. 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, all 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 (loss) income.”
| Cash and cash equivalents |
Cash and cash equivalents consist primarily of highly liquid
cash investment funds with original maturities of three months
or less when acquired.
| Short-term investments |
Short-term investments are carried at fair value, with
unrealized gains and losses, net of tax, reported as a separate
component of stockholders’ equity. The amortized cost of
debt securities is adjusted for amortization
F-7
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
of premiums and accretion of discounts to maturity. Such
amortization is included in investment and interest income.
Realized gains and losses and declines in value judged to be
other-than-temporary on short-term investments are included in
investment and interest income. The cost of securities sold is
based on the specific identification method. Interest and
dividends on securities classified as available-for-sale are
included in interest income.
| Segment information |
The Company identifies its operating segments based on business
activities, management responsibility and geographical location.
For all periods presented, the Company operated in a single
business segment. Revenue by geographic location is presented in
Note 10.
| Concentration of credit risk |
The Company sells its diagnostic products primarily to
established large reference laboratories, public health
laboratories and hospitals. Credit is extended based on an
evaluation of the customer’s financial condition and
generally collateral is not required.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash
equivalents, and short-term investments. The Company limits its
exposure to credit loss by placing its cash with high credit
quality financial institutions. The Company generally invests
its excess cash in investment grade municipal securities,
mortgage-backed securities and corporate bonds.
| Fair value of financial instruments |
The carrying value of cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued liabilities
approximates fair value.
| Collectibility of accounts receivable |
The Company maintains an allowance for doubtful accounts for
estimated losses resulting from the inability of its customers
to make required payments. Credit losses historically have been
minimal and within management’s expectations. If the
financial condition of the Company’s customers were to
deteriorate, resulting in an impairment of the customer’s
ability to make payments, additional allowances would be
required.
| Stock-based compensation |
| Deferred issuance restricted stock awards |
In each of May 2005, June 2004 and August 2003, the Company
granted to its chief executive officer 20,000 shares of
Deferred Issuance Restricted Stock Awards under the 2003
Incentive Award Plan of the Company (the “2003 Plan”),
resulting in deferred compensation of $871,000, $839,000 and
$600,000, respectively, associated with these grants. The
deferred compensation is being amortized to expense on a
straight-line basis over the vesting periods (48 months) of
the Deferred Issuance Restricted Stock Awards. For the years
ended December 31, 2005, 2004 and 2003, the Company
recorded $487,000, $273,000 and $62,000, respectively in
stock-based compensation expense related to these Deferred
Issuance Restricted Stock Awards. At December 31, 2005,
there was $1,488,000 remaining in unamortized deferred
compensation. The estimated amortization expense of the deferred
compensation on the Deferred Issuance Restricted Stock Awards as
of December 31, 2005, is $577,000 for 2006, $515,000 in
2007, $305,000 in 2008 and $91,000 in 2009.
F-8
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
| Restricted stock awards |
In October 2005, the Company granted 112,000 shares of
restricted stock to certain executive officers and key employees
under the 2003 Plan, resulting in deferred compensation of
$4,760,000 associated with these grants. The deferred
compensation for these restricted stock awards is based on the
number of shares granted multiplied by the fair value of the
stock on the date of grant, which is being amortized as
stock-based compensation expense over the vesting period
(48 months) of the restricted stock awards. For the year
ended December 31, 2005, the Company recognized $297,000 in
stock-based compensation expense related to these awards. At
December 31, 2005, there was $4,463,000 remaining in
unamortized deferred compensation. The estimated amortization
expense of the deferred compensation on the restricted stock
awards as of December 31, 2005, is $1,190,000 for each of
2006, 2007 and 2008 and $893,000 for 2009.
| Common stock |
The Company also issued 3,138, 3,660 and 3,718 shares of
common stock under the 2003 Plan during the years ended
December 31, 2005, 2004 and 2003, to members of the Board
of Directors as partial consideration for services rendered,
resulting in an expense totaling $136,000, $140,000 and $87,000,
respectively, which was equal to the fair market value on the
date of grants.
| Stock options and employee stock purchase plan |
The Company accounts for employee stock-based compensation
pursuant to APB Opinion No. 25, “Accounting for Stock
Issued to Employees.” Using the intrinsic value method of
accounting under APB No. 25, no compensation expense is
recognized because the exercise price of the Company’s
employee stock awards equals the market price of the underlying
stock on the date of grant.
As required under SFAS No. 123, the pro forma effects
of stock-based compensation on net income and earnings per share
have been estimated at the date of grant using the minimum value
option pricing model from the Company’s stock option
plans’ inception date in August 2000 through
September 15, 2002 and the Black-Scholes option-pricing
model for all option grants made subsequent to that date when
the Company’s shares began to be publicly traded. The fair
value of each purchase right issued under the Company’s
Employee Stock Purchase Plan (“ESPP”) for the years
ended December 31, 2005, 2004 and 2003 was estimated on the
date of grant using the Black-Scholes pricing model.
During the year ended December 31, 2004, the Company
recorded an option-related non-cash compensation charge of
approximately $729,000 related to the departure of a former
executive.
The following weighted average assumptions were used:
| Stock Option Plans | ESPP | |||||||||||||||||||||||
| 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | |||||||||||||||||||
|
Risk-free interest rate
|
3.97 | % | 3.18 | % | 2.76 | % | 3.04 | % | 1.04 | % | 1.00 | % | ||||||||||||
|
Volatility
|
49 | % | 63 | % | 47 | % | 48 | % | 60 | % | 54 | % | ||||||||||||
|
Dividend yield
|
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
|
Expected life (years)
|
5.2 | 4.0 | 4.0 | 0.5 | 0.5 | 0.2 | ||||||||||||||||||
|
Resulting average fair value
|
$ | 21.02 | $ | 18.83 | $ | 10.78 | $ | 10.86 | $ | 9.35 | $ | 4.53 | ||||||||||||
During 2005, in preparation for the adoption of
SFAS No. 123(R), the Company changed its method of
estimating the expected volatility associated with stock option
grants. Historically, the Company relied exclusively on the
historical stock price changes (using daily pricing) and has
since determined that a better estimate is used by taking an
average of the historical stock price changes (using daily
pricing) and the implied volatility on its traded options.
Adopting this change has resulted in a decrease in the
Company’s
F-9
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
weighted average volatility assumption from 63% in 2004 to 49%
in 2005. Due to the Company’s relatively short exercise
history (commencing in May 2003), the expected term of options
granted is estimated by using the Section 16 Insider
reported data from a select group of peers whereas in previous
years, the Company believed the vesting period approximated the
expected life. Adopting this change has resulted in an increase
in the Company’s weighted average expected term assumption
from 4.0 years in 2004 to 5.2 years in 2005. The
risk-free interest rate is determined based upon a constant U.S
Treasury Security with a contractual life that approximates the
expected term of the option award.
Compensation cost is currently amortized over the vesting period
using an accelerated graded method in accordance with Financial
Accounting Standards Board (“FASB”) Interpretation
No. 28, “Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plans.” Effective
January 1, 2006, in conjunction with the adoption of
SFAS No. 123(R), the Company will amortize all new
grants straight-line over the vesting period. The Company plans
to adopt the provisions of SFAS No. 123(R) using the
modified prospective application, which provides for certain
changes to the method for valuing share-based compensation.
Under the modified prospective application, prior periods are
not revised for comparative purposes. The valuation provisions
of SFAS No. 123(R) apply to new awards and to awards that
are outstanding on the effective date and subsequently modified
or cancelled. At December 31, 2005, unamortized
compensation expense related to outstanding unvested options, as
determined in accordance with SFAS No. 123, was
approximately $30,000,000 before income taxes. In 2006, the
Company will begin to record this unamortized amount as stock
compensation expense pursuant to the vesting schedules of the
underlying option awards. The Company will incur additional
expense during 2006 related to new awards granted during 2006
that cannot yet be quantified.
Had compensation expense for stock options granted and issued
ESPP purchase rights been determined based on their fair value
at the date of grant, accounting consistent with
SFAS No. 123, the Company’s net income and net
income per share would have been as follows (in thousands,
except per share data):
| Years Ended December 31 | ||||||||||||||
| 2005 | 2004 | 2003 | ||||||||||||
|
Net income:
|
||||||||||||||
|
As reported
|
$ | 60,089 | $ | 54,575 | $ | 35,330 | ||||||||
|
Stock-based employee compensation expense included in reported
net income, net of related tax effects
|
470 | 601 | 37 | |||||||||||
|
Total stock-based employee compensation expense determined under
fair value based method for all options, net of related tax
effects
|
(15,309 | ) | (13,280 | ) | (4,412 | ) | ||||||||
|
Pro forma net income
|
$ | 45,250 | $ | 41,896 | $ | 30,955 | ||||||||
|
Net income per share:
|
||||||||||||||
|
As reported
|
||||||||||||||
|
Basic
|
$ | 1.19 | $ | 1.10 | $ | 0.74 | ||||||||
|
Diluted
|
$ | 1.15 | $ | 1.06 | $ | 0.72 | ||||||||
|
Pro forma
|
||||||||||||||
|
Basic
|
$ | 0.89 | $ | 0.85 | $ | 0.65 | ||||||||
|
Diluted
|
$ | 0.86 | $ | 0.82 | $ | 0.63 | ||||||||
For the reasons noted below, certain adjustments were required
to increase pro forma expenses for 2004 and 2003, resulting in a
decrease of $2,311,000 and $1,320,000 to the adjusted pro forma
net income, a
F-10
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
decrease of $.04 and $.02 to the adjusted pro forma basic, and
$.04 and $.03 to the adjusted pro forma diluted net income per
share for the years ended December 31, 2004 and 2003,
respectively.
During the year ended December 31, 2005, in conjunction
with the Company’s assessment of the impact of adopting
SFAS No. 123(R), the Company determined that the pro forma
expense related to actual forfeiture rates was computed
incorrectly, as generated by a third party stock administration
software. Further, the Company determined that it provided
excess tax benefits on certain types of stock based compensation
before they would have been realized as required by SFAS
No. 123. As a result, the Company’s pro forma
compensation expense, adjusted for these two matters, is
different than the amounts previously disclosed as follows (in
thousands, except per share data):
| Three Months Ended | Years Ended | ||||||||||||||||||||
| December 31 | |||||||||||||||||||||
| September 30, | June 30, | March 31, | |||||||||||||||||||
| 2005 | 2005 | 2005 | 2004 | 2003 | |||||||||||||||||
|
As previously disclosed:
|
|||||||||||||||||||||
|
Pro forma net income
|
$ | 12,580 | $ | 9,247 | $ | 9,920 | $ | 44,207 | $ | 32,275 | |||||||||||
|
Pro forma diluted net income per share
|
$ | 0.24 | $ | 0.18 | $ | 0.19 | $ | 0.86 | $ | 0.66 | |||||||||||
|
As revised:
|
|||||||||||||||||||||
|
Pro forma net income
|
$ | 12,578 | $ | 9,697 | $ | 9,588 | $ | 41,896 | $ | 30,955 | |||||||||||
|
Pro forma diluted net income per share
|
$ | 0.24 | $ | 0.19 | $ | 0.18 | $ | 0.82 | $ | 0.63 | |||||||||||
| 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. Revenue from the
Company’s blood screening products shipped to countries
where regulatory approval has been received is recorded as
product sales based on a contracted transfer price with its
third-party collaboration partner, Chiron Corporation
(“Chiron”). Based on the terms of the Company’s
agreement with Chiron, the Company’s ultimate share of the
net revenue from sales to the end user is not known until
reported by Chiron.
The Company manufactures its blood screening products according
to Chiron’s demand specifications and transfers completed
product to Chiron’s virtual warehouse, which is located on
Gen-Probe’s premises. Upon transfer to Chiron’s
virtual warehouse, the Company bills Chiron at an agreed upon
transfer price, and Chiron remits payment within 30 days.
In the past, the Company recorded all amounts billed as deferred
revenue until shipment from the virtual warehouse to
Chiron’s end-customers or Chiron’s international
warehouse; upon which the Company then recognized blood
screening product sales at the transfer price and recorded the
related cost of products sold. The Company then adjusted blood
screening product sales upon the Company’s receipt of
customer revenue reports and a net payment from Chiron of
amounts reflecting its ultimate share of net sales by Chiron of
these products, less the transfer price revenues previously paid.
During the year ended December 31, 2005, the Company’s
U.S. blood screening sales increased by approximately
$5,358,000 due to the recognition of previously deferred revenue
resulting from the shipment of Chiron controlled blood screening
products from Chiron’s virtual warehouse to Chiron’s
recently established third party warehouse, rather than directly
to their end-customers.
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
F-11
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
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 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 Chiron for use in blood
screening and records these instrument sales upon delivery since
Chiron 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 first 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 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
related to the agreement. Milestone payments are recognized as
revenue upon the achievement of specified milestones when
(i) the Company has earned the milestone payment,
(ii) the milestone is substantive in nature and the
achievement of the milestone is not reasonably assured at the
inception of the agreement, (iii) the fees are
non-refundable, and (iv) performance obligations after the
milestone achievement will continue to be funded by the
collaborator at a level comparable to the level before the
milestone achievement. Any amounts received prior to satisfying
the Company’s revenue recognition criteria are recorded as
deferred revenue on the balance sheet.
Royalty revenue is recognized related to the manufacture, 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.
| Cost of revenues |
Cost of product sales reflects the costs applicable to products
shipped for which product sales revenue is recognized in
accordance with the Company’s revenue recognition policy.
The Company manufactures products for commercial sale as well as
development stage products for internal use or clinical
evaluation. The Company follows SFAS No. 2,
“Accounting for Research and Development Costs” in
classifying costs between cost of product sales and research and
development costs.
F-12
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The Company does not separately track all of the costs
applicable to collaborative research revenue, as there is not a
distinction between the Company’s internal development
activities and the development efforts made pursuant to
agreements with third parties. The costs applicable to the blood
screening development collaboration are reflected in the
statements of income under the captions “Research and
development,” “Marketing and sales” and
“General and administrative” based on the nature of
the costs. The costs incurred related to collaborative research
revenue have exceeded the amounts recorded as revenue for all
periods presented.
| Shipping and handling expenses |
Shipping and handling expenses are included in cost of product
sales and totaled approximately $4,280,000, $2,569,000, and
$2,258,000 for the years ended December 31, 2005, 2004 and
2003, respectively.
| Contingencies |
Contingent gains/losses are not recorded in the Company’s
financial statements since this accounting treatment could
result in the recognition of gains/losses that might never be
realized. The Company is currently involved in arbitration
proceedings with Bayer Corporation (“Bayer”)
concerning the parties’ collaboration for the development
and sale of nucleic acid diagnostic tests for viral organisms.
The Company received an arbitration award in tentative form in
April 2005 and in interim form in June 2005. The arbitrator
found, among other things, that Bayer is required to reimburse
the Company $2,000,000 for the Company’s legal fees and
expenses related to the arbitration proceedings. The
arbitrator’s final decision in this matter is subject to a
right to appeal to an arbitration panel. Upon receipt of the
final arbitration award and receipt of cash, if any, to
reimburse the Company’s legal fees and expenses, the
Company expects to record the proceeds as a credit to expense
either (i) within the general and administrative caption in
the Company’s statement of income where the legal fees and
expenses were previously recorded or (ii) as a separate
arbitration award operating expense line item.
| Inventories |
Inventories are stated at the lower of cost
(first-in, first-out)
or market. The estimated reserve is based on management’s
review of inventories on hand, compared to estimated future
usage and sales, shelf-life and assumptions about the likelihood
of obsolescence.
| Patent costs |
The Company capitalizes the costs incurred to file and prosecute
patent applications. The Company amortizes these costs on a
straight-line basis over the lesser of the remaining useful life
of the related technology or eight years. At December 31,
2005 and 2004, capitalized patent costs, which have been
included in “License, manufacturing access fees and other
assets” on the consolidated balance sheet, totaled
approximately $1,005,000 and $1,243,000, respectively, net of
accumulated amortization. The Company expenses all costs related
to abandoned patent applications.
| Capitalized software costs |
The Company capitalizes costs incurred in the development of
computer software related products under development after
establishment of technological feasibility. These capitalized
costs are recorded at the lower of unamortized cost or net
realizable value and are amortized over the estimated life of
the related product of ten years.
F-13
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
| Long-lived assets |
Property, plant and equipment and intangible assets with
definite useful lives are stated at cost. Depreciation of
property, plant and equipment and intangible assets is provided
using the straight-line method over the estimated useful lives
of the assets as follows:
| Years | ||
|
Building
|
10-39 | |
|
Machinery and equipment
|
3-7 | |
|
Furniture and fixtures
|
3 |
Depreciation expense was $16,265,000, $14,497,000 and
$14,380,000 for the years ended December 31, 2005, 2004 and
2003, respectively. Amortization of leasehold improvements is
provided over the shorter of the remaining life of the lease or
estimated useful life of the asset. The costs of other purchased
intangibles are amortized over their estimated useful lives. See
Footnote 4 for further details of the Company’s
intangible assets and related amortization expense.
| Impairment of long-lived assets |
In accordance with SFAS No. 142, “Goodwill and
Other Intangible Assets,” the Company does not amortize its
goodwill and intangible assets with indefinite useful lives.
SFAS No. 142 requires that these assets be reviewed
for impairment at least annually. The Company completed its
impairment test in the fourth quarter of 2005 and determined
that no impairment loss was necessary. If the assets were
considered to be impaired, the impairment charge would be the
amount by which the carrying value of the assets exceeds the
fair value of the assets.
In accordance with SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets,” if
indicators of impairment exist, the Company assesses the
recoverability of the affected long-lived assets by determining
whether the carrying value of such assets can be recovered
through undiscounted future operating cash flows. If impairment
is indicated, the Company measures the amount of such impairment
by comparing the fair value to the carrying value. There have
been no indicators of impairment through December 31, 2005.
| Self-insurance reserves |
The Company’s consolidated balance sheets at
December 31, 2005 and 2004 include approximately $1,816,000
and $1,402,000, respectively, of liabilities associated with
employee benefit costs that are retained by the Company,
including medical costs and workers’ compensation claims.
The Company estimates the required liability of such claims on
an undiscounted basis utilizing an actuarial method that is
based upon various assumptions which include, but are not
limited to, the Company’s historical loss experience and
projected loss development factors. The required liability is
also subject to adjustment in the future based upon the changes
in claims experience, including changes in the number of
incidents (frequency) and change in the ultimate cost per
incident (severity).
| Accumulated other comprehensive (loss) income |
In accordance with SFAS No. 130, “Reporting
Comprehensive Income,” all components of comprehensive
income, including net income, are reported in the financial
statements in the period in which they are recognized.
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 (loss)
income, which includes certain changes in stockholders’
equity such as foreign currency translation of the
Company’s wholly owned subsidiary’s 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.
F-14
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
| Research and development |
Research and development costs are expensed as incurred.
| Income taxes |
The asset and liability approach is used to recognize deferred
tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. The impact
of tax law and rate changes is reflected in income in the period
such changes are enacted. As needed, the Company records a
valuation allowance to reduce the deferred tax assets to the
amount that is more likely than not to be realized based on
expected future taxable income.
The Company’s income tax returns are based on calculations
and assumptions that are subject to examination by various tax
authorities. While the Company believes it has appropriate
support for the positions taken on its tax returns, the Company
regularly assesses the potential outcomes of these examinations
and any future examinations in determining the adequacy of its
provision for income taxes. As part of its assessment of
potential adjustments to its tax returns, the Company increases
its current tax liability to the extent an adjustment would
result in a cash tax payment or decreases its deferred tax
assets to the extent an adjustment would not result in a cash
tax payment. The Company reviews, at least quarterly, the
likelihood and amount of potential adjustments and adjusts the
income tax provision, the current tax liability and deferred
taxes in the period in which the facts that give rise to a
revision become probable and estimable.
| Reclassifications |
Certain prior year amounts have been reclassified to conform
with the current year presentation.
| Recent accounting pronouncements |
In December 2004, the FASB issued revised Statement No. 123
(“SFAS No. 123(R)”) “Share-Based
Payment,” which requires companies to expense the estimated
fair value of employee stock options and similar awards. Pro
forma disclosure is no longer an alternative. In March 2005, the
Securities and Exchange Commission (“SEC”) released
SEC Staff Accounting Bulletin (“SAB”) No. 107,
“Share-Based Payment.” SAB No. 107 provides
the SEC staff’s position regarding the valuation of
share-based payment arrangements for public companies. In April
2005, the SEC adopted a rule that effectively required the
Company to implement SFAS No. 123(R) beginning on
January 1, 2006.
As permitted by SFAS No. 123, “Accounting for
Stock-Based Compensation,” the Company accounted through
December 31, 2005, for share-based payments to employees
using the intrinsic value method of Opinion No. 25 issued
by the Accounting Principles Board (“APB”) and, as
such, generally recognized no compensation cost for employee
stock options. Accordingly, the adoption of
SFAS No. 123(R)’s fair value method will have a
significant impact on the Company’s statements of income,
although it is not expected to have an impact on the
Company’s overall financial position. The impact of
adoption of SFAS No. 123(R) cannot be predicted at
this time because it will depend on levels of share-based
payments granted in the future. However, had the Company adopted
SFAS No. 123(R) in prior periods, the impact of that
standard would have approximated the impact of
SFAS No. 123 as described in the disclosure of pro
forma net income and earnings per share in Note 1 to the
consolidated financial statements. SFAS No. 123(R)
also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash
flow, rather than as an operating cash flow as required under
current standards. This requirement will reduce net operating
cash flows and increase net financing cash flows in periods
after adoption.
In November 2004, the FASB issued SFAS No. 151,
“Inventory Costs — an amendment of ARB 43,
Chapter 4,” which clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). SFAS No. 151
requires that those items be recognized as current-
F-15
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
period charges regardless of whether they meet the criterion of
“so abnormal.” In addition, it requires that
allocation of fixed production overhead to the costs of
conversion be based on the normal capacity of production
facilities. SFAS No. 151 is effective for inventory
costs incurred during fiscal years beginning after July 15,
2005. The Company does not believe the adoption of this standard
will have a material impact on its financial position or results
of operations.
In December 2004, the FASB issued Staff Position
No. SFAS 109-1, “Application of Statement
No. 109, Accounting for Income Taxes, for the Tax Deduction
on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004”
(“SFAS No. 109-1”). SFAS No. 109-1
clarifies that the deduction will be treated as a “special
deduction” as described in SFAS No. 109,
“Accounting for Income Taxes.” As such, the special
deduction has no effect on deferred tax assets and liabilities
existing at the date of enactment. The Company has estimated the
current year impact of the deduction to be approximately
$750,000 tax benefit, which has been reflected in its income tax
expense for the year ended December 31, 2005.
| Net income per share |
The Company computes net income per share in accordance with
SFAS No. 128, “Earnings Per Share,” and
SAB No. 98. Under the provisions of
SFAS No. 128, 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.
Each quarter, the Company reports the potential dilutive impact
of stock options in its diluted earnings per common share using
the treasury-stock method.
Out-of-the-money stock
options (i.e., the average stock price during the period is
below the exercise price of the stock option) are not included
in diluted earnings per share.
The following table sets forth the computation of net income per
share (in thousands, except per share amounts):
| December 31 | |||||||||||||
| 2005 | 2004 | 2003 | |||||||||||
|
Net income
|
$ | 60,089 | $ | 54,575 | $ | 35,330 | |||||||
|
Weighted average shares outstanding — Basic
|
50,617 | 49,429 | 47,974 | ||||||||||
|
Effect of dilutive common stock options outstanding
|
1,828 | 1,974 | 1,163 | ||||||||||
|
Weighted average shares outstanding — Diluted
|
52,445 | 51,403 | 49,137 | ||||||||||
|
Net income per share:
|
|||||||||||||
|
Basic
|
$ | 1.19 | $ | 1.10 | $ | 0.74 | |||||||
|
Diluted
|
$ | 1.15 | $ | 1.06 | $ | 0.72 | |||||||
Dilutive securities include common stock options subject to
vesting. Potentially dilutive securities totaling 210,995,
244,296 and 1,470,911 for the years ended December 31,
2005, 2004 and 2003, respectively were excluded from the
calculation of diluted earnings per share because of their
anti-dilutive effect.
F-16
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
| 2. | Balance sheet information |
The following tables provide details of selected balance sheet
items (in thousands):
Inventories
| December 31 | ||||||||
| 2005 | 2004 | |||||||
|
Raw materials and supplies
|
$ | 5,430 | $ | 5,345 | ||||
|
Work in process
|
17,934 | 10,429 | ||||||
|
Finished goods
|
12,978 | 11,534 | ||||||
| $ | 36,342 | $ | 27,308 | |||||
Property, plant and equipment
| December 31 | ||||||||
| 2005 | 2004 | |||||||
|
Land
|
$ | 9,100 | $ | 9,100 | ||||
|
Building
|
39,535 | 40,593 | ||||||
|
Machinery and equipment
|
106,433 | 93,337 | ||||||
|
Leasehold improvements
|
16,301 | 15,907 | ||||||
|
Furniture and fixtures
|
10,346 | 9,874 | ||||||
|
Construction in-progress
|
32,143 | 8,775 | ||||||
|
Property, plant and equipment (at cost)
|
213,858 | 177,586 | ||||||
|
Less accumulated depreciation and amortization
|
(108,668 | ) | (100,935 | ) | ||||
|
Property, plant and equipment (net)
|
$ | 105,190 | $ | 76,651 | ||||
License, manufacturing access fees and other assets
| December 31 | ||||||||
| 2005 | 2004 | |||||||
|
Patents
|
$ | 15,822 | $ | 15,305 | ||||
|
Purchased intangible assets
|
33,636 | 33,636 | ||||||
|
License and manufacturing fees
|
48,126 | 22,026 | ||||||
|
Investment in Molecular Profiling Institute Inc.
|
2,500 | — | ||||||
|
Other
|
228 | 236 | ||||||
| 100,312 | 71,203 | |||||||
|
Less accumulated amortization
|
(50,664 | ) | (46,808 | ) | ||||
| $ | 49,648 | $ | 24,395 | |||||
As of December 31, 2005, the Company has capitalized
$20,952,000, net in software costs associated with development
of the TIGRIS instrument. In addition, the Company has an
aggregate of $20,135,000 in TIGRIS-related items consisting of
inventories, machinery and equipment and prepaid expenses.
F-17
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
| 3. | Short-term investments |
The following is a summary of short-term investments as of
December 31, 2005 (in thousands):
| Gross | Gross | |||||||||||||||
| Unrealized | Unrealized | Estimated | ||||||||||||||
| Cost | Gains | Losses | Fair Value | |||||||||||||
|
Municipal securities
|
$ | 184,713 | $ | 50 | $ | (1,466 | ) | $ | 183,297 | |||||||
|
Foreign debt securities
|
4,663 | — | — | 4,663 | ||||||||||||
|
Total short-term investments
|
$ | 189,376 | $ | 50 | $ | (1,466 | ) | $ | 187,960 | |||||||
The amortized cost and estimated fair value of
available-for-sale marketable securities as of December 31,
2005, by contractual maturity, are as follows (in thousands):
| Gross | Gross | ||||||||||||||||
| Unrealized | Unrealized | Estimated | |||||||||||||||
| Cost | Gains | Losses | Fair Value | ||||||||||||||
|
Maturities
|
|||||||||||||||||
|
Within one year
|
$ | 63,773 | $ | 30 | $ | (307 | ) | $ | 63,496 | ||||||||
|
After one year through five years
|
125,603 | 20 | (1,159 | ) | 124,464 | ||||||||||||
|
Total short-term investments
|
$ | 189,376 | $ | 50 | $ | (1,466 | ) | $ | 187,960 | ||||||||
The following table shows the gross unrealized losses and fair
values of 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, aggregated by investment category,
as of December 31, 2005 (in thousands):
| Less than 12 Months | More than 12 Months | |||||||||||||||
| Estimated | Unrealized | Estimated | Unrealized | |||||||||||||
| Fair Value | Losses | Fair Value | Losses | |||||||||||||
|
Municipal securities
|
$ | 118,603 | $ | (849 | ) | $ | 51,086 | $ | (617 | ) | ||||||
|
Foreign debt securities
|
— | — | — | — | ||||||||||||
|
Total short-term investments
|
$ | 118,603 | $ | (849 | ) | $ | 51,086 | $ | (617 | ) | ||||||
The following is a summary of short-term investments as of
December 31, 2004 (in thousands):
| Gross | Gross | |||||||||||||||
| Unrealized | Unrealized | Estimated | ||||||||||||||
| Cost | Gains | Losses | Fair Value | |||||||||||||
|
Municipal securities
|
$ | 162,234 | $ | 391 | $ | (332 | ) | $ | 162,293 | |||||||
|
Corporate obligations
|
4,021 | — | (5 | ) | 4,016 | |||||||||||
|
Mortgage backed government securities
|
2,035 | — | (16 | ) | 2,019 | |||||||||||
|
Total short-term investments
|
$ | 168,290 | $ | 391 | $ | (353 | ) | $ | 168,328 | |||||||
Gross realized gains from the sale of short-term investments
were $95,000 and $402,000 for the years ended December 31,
2005 and 2004, respectively. Gross realized losses from the sale
of short-term investments were $223,000 and $693,000 for the
years ended December 31, 2005 and 2004. Realized gains and
losses were not significant for the year ended December 31,
2003.
F-18
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
| 4. | Intangible assets by asset class and related accumulated amortization |
The Company’s intangible assets and related accumulated
amortization consisted of the following (in thousands):
| December 31 | ||||||||||||||||||||||||
| 2005 | 2004 | |||||||||||||||||||||||
| Accumulated | Accumulated | |||||||||||||||||||||||
| Gross | Amortization | Net | Gross | Amortization | Net | |||||||||||||||||||
|
Intangible assets subject to amortization:
|
||||||||||||||||||||||||
|
Capitalized software
|
$ | 25,142 | $ | 4,190 | $ | 20,952 | $ | 25,142 | $ | 1,676 | $ | 23,466 | ||||||||||||
|
Patents
|
15,822 | 14,817 | 1,005 | 15,305 | 14,062 | 1,243 | ||||||||||||||||||
|
Purchased intangible assets
|
33,636 | 32,330 | 1,306 | 33,636 | 31,994 | 1,642 | ||||||||||||||||||
|
License, manufacturing and other access fees
|
48,354 | 3,517 | 44,837 | 22,262 | 752 | 21,510 | ||||||||||||||||||
|
Total
|
$ | 122,954 | $ | 54,854 | $ | 68,100 | $ | 96,345 | $ | 48,484 | $ | 47,861 | ||||||||||||
|
Goodwill
|
$ | 26,298 | $ | 7,677 | $ | 18,621 | $ | 26,298 | $ | 7,677 | $ | 18,621 | ||||||||||||
|
Investment in Molecular Profiling Institute Inc.
|
$ | 2,500 | $ | — | $ | 2,500 | $ | — | $ | — | $ | — | ||||||||||||
In January 2005, the Company entered into a license agreement
with Corixa Corporation and received the right to develop
molecular diagnostic tests for multiple potential genetic
markers in the areas of prostate, ovarian, cervical, kidney,
lung and colon cancers. Pursuant to the terms of the agreement,
the Company paid Corixa an initial access license fee of
$1,600,000, an additional $1,600,000 in February 2006 and agreed
to pay an additional $1,600,000 on January 31, 2007, unless
the Company terminates the agreement prior to that date. The
license fee has been recorded as an intangible asset which is
being amortized on a straight-line basis to research and
development expense over the life of the licensed patents, or
10 years.
In February 2005, the Company entered into a supply and purchase
agreement with
F. Hoffman-La Roche
Ltd. and its affiliate Roche Molecular Systems, Inc. (together
referred to as “Roche”). Under this agreement, Roche
agreed to manufacture and supply to the Company oligonucleotides
for human papillomavirus (“HPV”). The Company plans to
use these oligonucleotides in molecular diagnostic assays.
Pursuant to the agreement, the Company paid Roche manufacturing
access fees of $20,000,000 in May 2005 and will pay $10,000,000
within 10 days of the occurrence of certain future
commercial events, but not later than December 1, 2008. The
Company also agreed to pay Roche transfer fees for the HPV
products. The initial $20,000,000 manufacturing access fee has
been recorded as an intangible asset which, upon
commercialization of the Company’s HPV products, is
expected to be amortized to cost of product sales over the
economic life of the products.
In October 2005, the Company entered into a non-exclusive
collaboration with Molecular Profiling Institute, Inc., a
private company, to accelerate market development for the
Company’s pipeline of cancer diagnostics. Under the terms
of the agreement, Molecular Profiling has agreed to validate,
commercialize and undertake market development activities for up
to four of the Company’s products, starting with the
Company’s analyte specific reagents to detect PCA3, a
genetic marker for the detection of prostate cancer. In
addition, in October 2005, the Company purchased from Molecular
Profiling, an aggregate of 1,000,000 shares of
Series B Preferred Stock, at a purchase price per share of
$2.50. The Company has recorded its $2,500,000 investment on a
cost basis, and will review the asset for impairment on an
ongoing basis.
F-19
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
In November of 2005, 2004 and 2003, the Company paid $3,000,000,
$1,000,000 and $3,000,000, respectively, to DiagnoCure related
to Gen-Probe’s exclusive license to DiagnoCure’s PCA3
technology in the prostate cancer diagnostic market. These
license fee payments have been recorded as an intangible asset
which is being amortized on a straight-line basis to research
and development over the remaining
12-year economic life
of the patent(s).
The Company had aggregate amortization expense of $6,370,000,
$3,717,000 and $1,442,000 for the years ended December 31,
2005, 2004 and 2003, respectively.
The expected future annual amortization expense of the
Company’s intangible assets is as follows (in thousands):
| Amortization | ||||||
| Years Ended December 31 | Expense | |||||
|
2006
|
$ | 5,854 | ||||
|
2007
|
5,587 | |||||
|
2008
|
5,424 | |||||
|
2009
|
5,305 | |||||
|
2010
|
4,925 | |||||
|
Thereafter
|
20,777 | |||||
|
Total
|
$ | 47,872 | ||||
| 5. | Long-term debt |
The Company has an unsecured bank line of credit agreement with
Wells Fargo Bank, N.A., which expires in July 2007, under which
the Company may borrow up to $10,000,000, subject to a
“borrowing base formula,” at the bank’s prime
rate, or at LIBOR plus 1.0%. At December 31, 2005, the
Company did not have any amounts outstanding under the line and
the Company has not taken advances against the line of credit
since its inception. The Company was in compliance with all of
the financial and restrictive covenants required by the line of
credit agreement at December 31, 2005.
| 6. | Related party transactions |
During the year ended December 31, 2003, the Company
recorded royalty expense to MLT of $1,451,000, prior to the
Company’s acquisition of a majority ownership interest in
MLT in August 2003. All royalty expense incurred by the Company
subsequent to the acquisition has been eliminated in the
consolidated financial statements.
F-20
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
| 7. | Income taxes |
The provision for income taxes consists of the following (in
thousands):
| Years Ended December 31 | |||||||||||||
| 2005 | 2004 | 2003 | |||||||||||
|
Current:
|
|||||||||||||
|
Federal
|
$ | 35,890 | $ | 22,499 | $ | 20,316 | |||||||
|
International
|
(103 | ) | 202 | 500 | |||||||||
|
State
|
684 | 1,589 | 1,264 | ||||||||||
| 36,471 | 24,290 | 22,080 | |||||||||||
|
Deferred:
|
|||||||||||||
|
Federal
|
(5,798 | ) | 3,389 | (3,443 | ) | ||||||||
|
International
|
40 | (114 | ) | 219 | |||||||||
|
State
|
892 | 2,439 | 910 | ||||||||||
| (4,866 | ) | 5,714 | (2,314 | ) | |||||||||
| $ | 31,605 | $ | 30,004 | $ | 19,766 | ||||||||
The Company has not provided for United States income taxes on
foreign subsidiaries undistributed earnings of approximately
$2,500,000 at December 31, 2005, which are expected to be
permanently reinvested outside the United States as these
earnings have previously been taxed in the United States as
Subpart F income.
Significant components of the Company’s deferred tax assets
and liabilities for federal and state income taxes are as
follows (in thousands):
| December 31 | |||||||||
| 2005 | 2004 | ||||||||
|
Deferred tax assets:
|
|||||||||
|
Research and other tax credit carry-forwards
|
$ | 4,576 | $ | 3,025 | |||||
|
Inventory reserves and capitalization
|
6,679 | 5,075 | |||||||
|
Deferred revenue
|
1,963 | 2,238 | |||||||
|
Deferred compensation
|
987 | 132 | |||||||
|
Accrued vacation
|
1,849 | 1,716 | |||||||
|
Other accruals and reserves (net)
|
1,275 | 453 | |||||||
|
Total deferred tax assets
|
17,329 | 12,639 | |||||||
|
Valuation allowance
|
(319 | ) | (1,243 | ) | |||||
|
Total net deferred tax assets
|
17,010 | 11,396 | |||||||
|
Deferred tax liabilities:
|
|||||||||
|
Other intangibles
|
(1,146 | ) | (638 | ) | |||||
|
Capitalized costs expensed for tax purposes
|
(8,534 | ) | (8,927 | ) | |||||
|
Depreciation
|
(2,065 | ) | (3,293 | ) | |||||
|
Total net deferred tax liabilities
|
(11,745 | ) | (12,858 | ) | |||||
|
Net deferred tax assets (liabilities)
|
$ | 5,265 | $ | (1,462 | ) | ||||
F-21
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Valuation allowances have been established for capital loss
carry-forwards and credits for which the Company has determined
it is more likely than not that these benefits will not be
realized. The valuation allowance decreased during the year as
credits were realized where previously there had been
uncertainty regarding their realization.
At December 31, 2005, the Company also had California
research and development credit carry-forwards of approximately
$6,777,000, which do not expire. In accordance with the Internal
Revenue Code (the “Code”) and applicable state rules,
the Company’s use of its credit carry-forwards could be
limited in the event of certain cumulative changes in the
Company’s stock ownership.
The provision for income taxes reconciles to the amount computed
by applying the federal statutory rate to income before taxes as
follows (in thousands):
| Years Ended December 31 | ||||||||||||||||||||||||
| 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | |||||||||||||||||||
|
Expected income tax provision at federal statutory rate
|
$ | 32,096 | $ | 29,603 | $ | 19,305 | 35 | % | 35 | % | 35 | % | ||||||||||||
|
State income tax provision, net of federal benefit
|
3,713 | 3,653 | 2,356 | 4 | % | 4 | % | 5 | % | |||||||||||||||
|
Federal tax credits
|
(635 | ) | (1,500 | ) | (1,500 | ) | (1 | )% | (2 | )% | (3 | )% | ||||||||||||
|
State tax credits
|
(1,314 | ) | (975 | ) | (943 | ) | (2 | )% | (1 | )% | (2 | )% | ||||||||||||
|
Other
|
(2,255 | ) | (777 | ) | 548 | (2 | )% | (1 | )% | 1 | % | |||||||||||||
|
Actual income tax provision
|
$ | 31,605 | $ | 30,004 | $ | 19,766 | 34 | % | 35 | % | 36 | % | ||||||||||||
Tax benefits of $8,677,000, $14,035,000 and $4,387,000 for the
years ended December 31, 2005, 2004 and 2003, respectively,
related to employee stock options and the Company’s ESPP
were credited to stockholders’ equity.
| 8. | Stockholders’ equity |
In May 2004, the Company’s stockholders approved an
increase in the authorized number of shares of common stock
under the Company’s Certificate of Incorporation from
100,000,000 to 200,000,000 shares.
In September 2002, the Company adopted a stockholder rights plan
that could discourage, delay or prevent an acquisition of the
Company under certain circumstances. The rights plan was amended
by the Board of Directors in November 2003. The rights plan
provides for preferred stock purchase rights attached to each
share of the Company’s common stock, which will cause
substantial dilution to a person or group acquiring 15% or more
of the Company’s stock if the acquisition is not approved
by the Company’s Board of Directors. In connection with the
rights plan, the Company declared a dividend of one preferred
share purchase right for each outstanding share of common stock
of the Company, which automatically adjusted to one-half of a
right as a result of the 100% stock dividend paid by the Company
in September 2003. Under the terms of the rights plan, the
rights would become exercisable on the tenth day following the
acquisition by a person or group of 15% or more of
Gen-Probe’s common stock, or commencement of a tender offer
for Gen-Probe’s common stock that would result in the
ownership of 15% or more of the Company’s common stock by
one person or group. Each right will initially represent the
right, under certain circumstances, to purchase 1/100 of a
share of newly created Series A Junior Participating
Preferred Stock of the Company at an exercise price of $300. The
exercise price is subject to adjustment by the Company. The
Board of Directors may terminate the rights plan or redeem the
rights at the redemption price of $0.01 per right, subject
to adjustment, at any time prior to the earlier of
September 26, 2012, the expiration date of the rights, or
the date of distribution of the rights, as determined under the
rights plan. The rights plan has a term of 10 years. The
F-22
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
initial distribution of rights is expected to be non-dilutive
and non-taxable to stockholders for United States federal income
tax purposes.
| Stock options |
The Company adopted the 2003 Plan in May 2003 that provides for
the issuance of up to 5,000,000 shares of common stock for
grants under the 2003 Plan. The 2003 Plan provides for
incentives for officers, directors, employees and consultants
through the granting of incentive and non-statutory stock
options, restricted stock and stock appreciation rights. The
exercise price of each option granted under the 2003 Plan must
be equal to or greater than the fair market value of the
Company’s stock on the date of grant. The Board of
Directors may determine the terms and vesting of all options and
other awards granted under the 2003 Plan; however, in no event
will the option term exceed 10 years. Generally, options
granted under the 2003 Plan will vest at the rate of 25% or 33%
one year from the grant date and 1/48 or 1/36, respectively,
each month thereafter until the options are fully vested.
The Company adopted the 2002 New Hire Stock Option Plan (the
“2002 Plan”) in November 2002 that provides for the
issuance of up to 400,000 shares of common stock for grants
under the 2002 Plan. The 2002 Plan provides for the grant of
non-statutory stock options only, with exercise price, option
term and vesting terms generally the same as those under the
2000 Plan described below. Options may only be granted under the
2002 Plan to newly hired employees of the Company.
The Company adopted the 2000 Equity Participation Plan (the
“2000 Plan”) in August 2000 that provides for the
issuance of up to 4,827,946 shares of common stock for
grants under the 2000 Plan. The 2000 Plan provides for the grant
of incentive and non-statutory stock options. The exercise price
of each option granted under the 2000 Plan must be equal to or
greater than the fair market value of the Company’s stock
on the date of grant. The Board of Directors may determine the
terms and vesting of all options; however, in no event will the
contractual term exceed 10 years. Generally, options vest
25% or 33% one year from the grant date and 1/48 or 1/36,
respectively, each month thereafter until the options are fully
vested.
A summary of the Company’s stock option activity for all
Plans is as follows:
| Number of | Weighted Average | ||||||||
| Shares | Exercise Price | ||||||||
|
Outstanding at December 31, 2002
|
4,678,092 | $ | 12.93 | ||||||
|
Granted
|
2,043,932 | 27.19 | |||||||
|
Exercised
|
(1,083,238 | ) | 13.20 | ||||||
|
Cancelled
|
(166,266 | ) | 16.34 | ||||||
|
Outstanding at December 31, 2003
|
5,472,520 | 18.10 | |||||||
|
Granted
|
2,061,329 | 37.21 | |||||||
|
Exercised
|
(1,178,052 | ) | 14.15 | ||||||
|
Cancelled
|
(351,743 | ) | 24.97 | ||||||
|
Outstanding at December 31, 2004
|
6,004,054 | 25.03 | |||||||
|
Granted
|
1,227,700 | 43.82 | |||||||
|
Exercised
|
(890,134 | ) | 17.65 | ||||||
|
Cancelled
|
(388,034 | ) | 32.78 | ||||||
|
Outstanding at December 31, 2005
|
5,953,586 | $ | 29.53 | ||||||
F-23
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
In addition, the Company had 60,000 shares of Deferred
Issuance Restricted Stock Awards and 112,000 shares of
restricted stock outstanding as of December 31, 2005 that
have not been reflected in the table above.
The following table summarizes information about stock options
outstanding at December 31, 2005:
| Options Outstanding | |||||||||||||||||||||
| Options Exercisable | |||||||||||||||||||||
| Weighted | |||||||||||||||||||||
| Average | Weighted | Weighted | |||||||||||||||||||
| Remaining | Average | Average | |||||||||||||||||||
| Shares | Contractual | Exercise | Shares | Exercise | |||||||||||||||||
| Outstanding | Life (Years) | Price | Exercisable | Price | |||||||||||||||||
|
Range of Exercise Prices
|
|||||||||||||||||||||
|
$ 6.75 - $12.29
|
943,767 | 6.3 | $ | 11.81 | 779,583 | $ | 11.76 | ||||||||||||||
|
$13.50 - $15.51
|
827,428 | 5.1 | 13.72 | 790,465 | 13.69 | ||||||||||||||||
|
$19.19 - $29.53
|
1,120,158 | 7.6 | 28.42 | 629,996 | 28.23 | ||||||||||||||||
|
$30.68 - $36.47
|
448,996 | 7.9 | 34.14 | 175,771 | 33.68 | ||||||||||||||||
|
$36.59
|
1,018,237 | 8.7 | 36.59 | 303,632 | 36.59 | ||||||||||||||||
|
$37.42 - $42.50
|
1,023,191 | 9.3 | 41.56 | 170,362 | 40.70 | ||||||||||||||||
|
$43.55 - $50.91
|
571,809 | 9.3 | 46.10 | 90,241 | 44.11 | ||||||||||||||||
| 5,953,586 | 7.7 | $ | 29.53 | 2,940,050 | $ | 22.35 | |||||||||||||||
Shares of common stock available for future grants under all
stock option plans were 940,420 at December 31, 2005.
The weighted-average grant-date fair value per share of options
granted during the periods were as follows:
| Years Ended December 31 | |||||||||||||
| 2005 | 2004 | 2003 | |||||||||||
|
Exercise price equal to the fair value of common stock on the
grant date:
|
|||||||||||||
|
Weighted-average exercise price
|
$ | 43.82 | $ | 37.21 | $ | 27.19 | |||||||
|
Weighted-average option fair value
|
$ | 21.02 | $ | 18.83 | $ | 10.78 | |||||||
|
Exercise price greater than fair value of common stock on the
grant date:
|
|||||||||||||
|
Weighted-average exercise price
|
$ | — | $ | — | $ | — | |||||||
|
Weighted-average option fair value
|
$ | — | $ | — | $ | — | |||||||
| Employee stock purchase plan |
In May 2003, the Company adopted, and the Company’s
stockholders subsequently approved, the ESPP that provides for
the issuance of up to 1,000,000 shares of the
Company’s common stock, as adjusted to reflect the 100%
stock dividend paid by the Company in September 2003. The ESPP
is intended to qualify under Section 423 of the Code and is
for the benefit of qualifying employees as designated by the
Board of Directors. Under the terms of the ESPP, purchases are
made semiannually. Participating employees may elect to have a
maximum of 15% of their compensation, up to a maximum of
$10,625 per six month period, withheld through payroll
deductions to purchase shares of common stock under the ESPP.
The purchase price of the common stock purchased under the ESPP
is equal to 85% of the fair market value of the common stock on
the offering
F-24
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
or “Grant Date” or the exercise or purchase date,
whichever is lower. During the years ended December 31,
2005, 2004 and 2003, employees purchased 96,779, 132,218 and
34,714 shares at an average price of $30.87, $28.49 and
$16.91 per share, respectively. As of December 31,
2005, 736,289 shares were reserved for future issuances
under the ESPP.
| 9. | Commitments and contingencies |
| Lease commitments |
The Company leases certain facilities under operating leases
which expire at various dates through August 31, 2009.
Future minimum payments under operating leases as of
December 31, 2005 are as follows (in thousands):
|
2006
|
$ | 2,065 | ||
|
2007
|
863 | |||
|
2008
|
167 | |||
|
2009
|
70 | |||
|
Total payments
|
$ | 3,165 | ||
Rent expense was $2,938,000, $2,626,000 and $1,700,000 for the
years ended December 31, 2005, 2004 and 2003, respectively.
| Collaborative agreements |
Effective May 2, 1997, the Company entered into agreements
which created a worldwide relationship between Gen-Probe and
bioMérieux Vitek, Inc. (“bMx”). The collaboration
involved research and development activities, as well as the
transfer to bMx of product distribution rights in international
markets, excluding Japan. As part of the agreements, Gen-Probe
licensed its probe-related technology to bMx to jointly develop
probe assays and adapt and develop instrumentation during a
five-year and ten-year term. In August 2000, the bMx agreement
was amended to transition the relationship from a collaborative
arrangement to two royalty bearing license agreements with
certain performance obligations. In September 2004, the Company
entered into a termination agreement with bMx which terminated
one of the August 2000 license agreements. In connection with
the termination agreement, the Company recorded net revenue of
$100,000 during the year ended December 31, 2004.
In September 2004, at the same time it entered into the
termination agreement, the Company signed non-exclusive
licensing agreements with bMx and its affiliates that provide
bMx’s affiliates options to access the Company’s
ribosomal RNA technologies for certain uses. Under the terms of
the agreements, bMx’s affiliates paid the Company $250,000
in 2004 for limited non-exclusive research licenses and options
to develop diagnostic products for certain targets using the
Company’s patented ribosomal RNA technologies. In January
2005, bMx’s affiliates exercised the first of these options
and paid $4,500,000 to the Company, pursuant to the terms of the
agreement. In December 2005, bMx’s affiliates exercised a
second option for additional targets and paid the Company
$2,100,000. During the year ended December 31, 2005, the
Company recorded $3,877,000 of these cumulative payments as
license fee revenue, based on the total number of targets
selected and the total number of targets that may be selected by
the end of 2006. By the end of 2006, bMx’s affiliates may
acquire rights to develop products for additional targets by
paying the Company up to an additional $900,000, depending on
the number of additional targets, if any, selected by bMx’s
affiliates. Further, the Company will receive royalties on the
sale of any products developed by bMx’s affiliates using
the Company’s intellectual property.
F-25
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
On February 3, 2006, bioMérieux terminated the second
of the two August 2000 license agreements. Upon payment of
minimum royalties for 2006 in the amount of $500,000, bMx will
not have any further obligations under the terminated license.
Termination of the second August 2000 license does not affect
the September 2004 licenses.
In June 1998, the Company entered into an agreement with Chiron
to form a strategic alliance to develop, manufacture and market
nucleic acid probe assay systems for blood screening and certain
areas of clinical diagnostics. Under the terms of the agreement,
Chiron or a third party will market and sell products that
utilize Chiron’s intellectual property relating to
hepatitis C virus (“HCV”) and human
immunodeficiency virus (type 1)(“HIV-1”) and the
Company’s patented technologies. The Company received an
up-front license fee of $10,000,000 from Chiron in 1998, which
the Company recorded as deferred revenue and is being recognized
as license revenue over a
10-year term. In
September 1998, Chiron assigned the clinical diagnostic portion
of the agreement to Bayer. The Company recorded licensing
revenues of approximately $670,000 from Chiron for each of the
years ended December 31, 2005, 2004 and 2003, respectively,
related to this aspect of the agreement. In January 2004, the
Company began United States clinical trials of the Procleix
Ultrio assay on the fully automated, high-throughput TIGRIS
instrument systems triggering a $6,500,000 contract milestone
payment under the agreement which the Company recorded as
license revenue. The Company may receive an additional
$10,000,000 contract milestone payment upon FDA approval of the
Procleix Ultrio assay on the TIGRIS instrument.
Since June 2003, U.S. blood centers have used the Procleix
West Nile virus (“WNV”) assay to screen more than
29 million units of donated blood under an Investigational
New Drug (“IND”) application. The Company submitted a
Biologics License Application (“BLA”) for the WNV
assay to the FDA in February 2005. The Company does not
separately track the costs applicable to the blood screening
development collaboration with Chiron and therefore is not able
to quantify the direct costs associated with the collaborative
research revenue. The Company believes that the costs incurred
related to the collaborative research revenue have exceeded the
amounts recorded as revenue in all periods presented. For the
years ended December 31, 2005, 2004 and 2003, the Company
recognized $18,369,000, $18,543,000 and $5,962,000,
respectively, in collaborative research revenue through its
collaboration with Chiron from deliveries of WNV tests on a
“cost recovery” basis. The Company has developed a NAT
assay to detect WNV, which is currently being used in clinical
trials under an IND application. For the years ended
December 31, 2005 and 2004, the Company recognized
$1,972,000 and $1,421,000, respectively in reimbursements for
expenses incurred for WNV development research as collaborative
research revenue. In early 2006, the Company expects to
discontinue recognizing these sales as collaborative research
revenue upon first shipment of FDA approved and labeled product.
The Company is currently developing the Procleix Ultrio assay, a
nucleic acid test (“NAT”) assay to detect HIV-1, HCV
and hepatitis B virus (“HBV”), in donated human blood.
Gen-Probe develops these assays through its collaboration with
Chiron. In March 2003, the Company signed a definitive agreement
with Chiron for the development and commercialization of the
Procleix Ultrio assay. During the years ended December 31,
2005, 2004 and 2003, the Company received $2,759,000, $2,766,000
and $3,932,000, respectively, in reimbursements for expenses
incurred related to the development of the Procleix Ultrio assay
from Chiron.
With respect to the Company’s collaboration with Chiron,
both parties have obligations to each other. The Company is
obligated to manufacture and supply its blood screening assay to
Chiron, and Chiron 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 Chiron intends to take
delivery, and certain quantities specified on a rolling
12-month forecast.
In connection with the joint development of the Procleix HIV-1/
HCV assay, and as a condition for Chiron’s agreement to pay
for most of the clinical trial costs related to approval of that
assay, the Company
F-26
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
agreed to pay the costs related to the clinical trial for the
next joint development project with Chiron. The obligation of
Gen-Probe was limited to the cost incurred for the previous
joint clinical trial, which was approximately $4,100,000. During
the year ended December 31, 2004, the Company satisfied
this obligation and began to bill Chiron for its share of
qualifying clinical trial expenses for the eSAS Ultrio and
WNV projects in accordance with their agreement.
In August 2005, the Company entered into a collaboration
agreement with Millipore Corporation (“Millipore”) to
develop, manufacture and commercialize NAT products for rapid
microbiological and viral monitoring for Millipore’s
exclusive use or sale in process monitoring in the biotechnology
and pharmaceutical manufacturing industries. Under the terms of
the agreement, the Company will be primarily responsible for
assay development and manufacturing, while Millipore will manage
worldwide commercialization of any products resulting from the
collaboration.
In July 2005, the Company entered into a collaboration agreement
with GE Infrastructure Water and Process Technologies
(“GEI”), a unit of General Electric Company, to
develop, manufacture and commercialize NAT products designed to
detect the unique genetic sequences of microorganisms for
GEI’s exclusive use or sale in selected water testing
applications. Under the terms of the agreement, the Company will
be primarily responsible for assay development and
manufacturing, while GEI will manage worldwide commercialization
of any products resulting from the collaboration.
| License agreements |
In connection with its research and development efforts, the
Company has various license agreements with unrelated parties
that provide the Company with rights to develop and market
products using certain technology and patent rights maintained
by the parties. Terms of the various license agreements require
the Company to pay royalties ranging from 1% up to 16% of future
sales on products using the specified technology. Such
agreements generally provide for a term which commences upon
execution and continues until expiration of the last patent
relative to the technology.
Effective January 1, 2004, the Company entered into
agreements with Tosoh Corporation to cross-license intellectual
property covering certain NAT technologies. The licenses cover
products in clinical diagnostics and other related fields. Under
the agreements, Tosoh received non-exclusive rights to the
Company’s proprietary Transcription-Mediated Amplification
(“TMA”), and rRNA technologies in exchange for two
payments during 2004 totalling $7,000,000, which was recognized
as revenue in the first quarter of 2004 as there were no
additional obligations placed on the Company after the effective
date of the contract and the transfer of the technology.
Additionally, Tosoh will pay the Company royalties on worldwide
sales of any future products that employ Gen-Probe’s
technologies licensed by Tosoh. The Company will gain access, in
exchange for the payment of royalties, to Tosoh’s patented
Transcription Reverse-Transcription Concerted (“TRC”),
amplification and Intercalation Activating Fluorescence
detection technologies for use with the Company’s real time
TMA technology.
| Government contract |
In October 2002, the Company received a $1,000,000 cost sharing
contract with the National Institutes of Health
(“NIH”) to develop a NAT assay for the detection of
the WNV. In February 2003, this amount was increased by
$2,470,000 and the Company filed for an IND covering the WNV. In
November 2003, the Company received $4,300,000 of supplemental
contract funding from the NIH. This contract extension supported
the Company’s pursuit of clinical studies and submission of
a BLA for the Company’s NAT for the detection of WNV in
donated human blood. The Company initiated the development of
this assay and has recognized collaborative research revenue
under the contract extension as reimbursable costs were
incurred. Under these NIH WNV contracts, the Company recorded
revenue totaling $2,952,000 and $4,817,000 for the
F-27
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
years ended December 31, 2004 and 2003, respectively. As of
July 2004, the Company had billed and collected all monies under
this contract.
| Litigation |
The Company is a party to the following litigation and may be
involved in other litigation in the ordinary course of business.
The Company intends to vigorously defend its interests in these
matters. The Company expects that the resolution of these
matters will not have a material adverse effect on its business,
financial condition or results of operations. However, due to
the uncertainties inherent in litigation, no assurance can be
given as to the outcome of these proceedings. If any of these
matters were resolved in a manner unfavorable to the Company,
its business, financial condition and results of operations
would be harmed.
| Enzo Biochem, Inc. |
In June 1999, the Company was sued by Enzo Biochem, Inc. in the
United States District Court for the Southern District of New
York. Enzo alleged that the Company and other defendants have
willfully infringed United States patent no. 4,900,659, or the
“’659 patent,” through the manufacture and sale
of products for the diagnosis of gonorrhea. On July 27,
2004, the District Court granted summary judgment in favor of
the Company and other defendants, and against Enzo, holding that
the ‘659 patent is invalid based on the on-sale doctrine.
On September 30, 2005, the United States Court of Appeals
for the Federal Circuit affirmed the judgment in the
Company’s favor. Enzo did not file for rehearing with the
Federal Circuit or petition the U.S. Supreme Court for a
writ of certiorari within the time allowed. The Company believes
that this matter is now concluded.
| Bayer Corporation |
In November 2002, the Company filed a demand for arbitration
against Bayer in the Judicial Arbitration &
Mediation Services, Inc. (“JAMS”), office in
San Diego, California related to the Company’s
collaboration with Bayer for nucleic acid diagnostic tests for
viral organisms. Under the terms of the June 1998 collaboration
agreement, Bayer acquired the exclusive right to distribute
nucleic acid diagnostic tests designed and developed by
Gen-Probe for the detection of human immunodeficiency virus
(“HIV”), hepatitis viruses and other specified
viruses, subject to certain conditions. Gen-Probe’s demand
for arbitration stated that Bayer failed to fulfill the
conditions required to maintain exclusive distribution rights.
The arbitration demand sought confirmation that the agreement
grants Gen-Probe, in the present circumstances, a co-exclusive
right to directly distribute the viral diagnostic tests that are
the subject of the agreement. In November 2003, Bayer filed a
counterclaim for money damages based on alleged delays in the
development of the TIGRIS instrument, alleged delays in the
development of certain assays, and other claims. Bayer
Healthcare LLC was also added as a respondent and
counterclaimant. The hearing on the matter began on
September 13, 2004 and closing arguments were completed on
November 3, 2004.
On April 5, 2005, the arbitrator issued a Tentative Opinion
and Award, and requested comments be submitted from the parties
related to implementation of the decision. After considering and
incorporating some of the parties’ suggestions, on
June 24, 2005, the arbitrator issued an Interim Opinion and
Award. The Interim Opinion and Award adopted all substantive
rulings of the Tentative Opinion and Award. The arbitrator
determined that the Company is entitled to a co-exclusive right
to distribute qualitative TMA assays to detect HCV and HIV-1 for
the remaining term of the agreement. Bayer previously held the
exclusive rights to market these products. The arbitrator also
determined that the collaboration agreement should be
prospectively terminated, as the Company requested. As a result
of a termination of the agreement, the Company will have the
right to develop and market future viral assays that had been
previously reserved for Bayer. Bayer will retain co-exclusive
rights to distribute two products that it currently markets.
Bayer also will be required to reimburse the Company $2,000,000
for the Company’s legal fees and expenses related to the
F-28
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
arbitration proceedings. As discussed in Note 1 —
Summary of significant accounting policies (Contingencies), the
Company will not record any award for reimbursement of legal
fees and expenses until the arbitration has been finalized and
the cash has been received.
The arbitrator rejected Bayer’s multimillion-dollar
counterclaim for damages. In the June 2005 Interim Opinion and
Award, the arbitrator also concluded that an additional hearing
would be required to determine whether a royalty payment would
be required as a result of the Company exercising its
co-exclusive rights to distribute the qualitative TMA assays for
HCV and HIV-1, and, if so, the amount and beneficiary of such
royalties. The additional hearing took place on September 14
and 15, 2005. On March 3, 2006, the arbitrator issued
his Tentative Award following the additional hearing. The
arbitrator concluded that Gen-Probe is licensed under the
relevant HIV and HCV patents for qualitative assays during the
term of the collaboration agreement and that the Company is not
obligated to pay Bayer an initial license fee in connection with
the sale of those assays. The arbitrator further concluded that
the Company will be required to pay running sales royalties to
Bayer on the Company’s sales of the qualitative TMA assays
for HCV and HIV-1. The Company believes the royalty rates are
generally consistent with rates paid by other licensees of the
relevant patents. The March 3, 2006 Tentative Award is
subject to revision by the arbitrator following comments by the
parties.
The arbitrator’s final decision in this matter is subject
to a right to appeal to an arbitration appeal panel within JAMS.
There can be no assurances as to the final outcome of the
arbitration.
A separate patent infringement action that the Company filed in
March 2004 against Bayer remains pending in the United States
District Court for the Southern District of California. This
action alleges that Bayer’s bDNA nucleic acid tests for HIV
and HCV infringe Gen-Probe’s U.S. patent no.
5,955,261, entitled “Method for Detecting the Presence of
Group-Specific Viral mRNA in a Sample,” or the
“’261 patent.” Bayer’s bDNA tests are not
covered by the collaboration agreement between the companies.
Bayer has denied the allegations of infringement and alleged
that the ’261 patent is invalid or unenforceable. On
August 10, 2005, the Company subsequently amended its
complaint to further allege that Bayer’s HIV and HCV bDNA
tests also infringe Gen-Probe’s U.S. patent no.
5,424,413, entitled “Branched Nucleic Acid Probes” and
Gen-Probe’s
U.S. patent no. 5,451,503, entitled “Method for Use of
Branched Nucleic Acid Probes.” On August 23, 2005,
Gen-Probe filed a second patent infringement action against
Bayer, alleging that Bayer’s bDNA nucleic acid test for HBV
infringes the ’261 patent and further alleging that
Bayer’s bDNA nucleic acid test for HCV infringes
Gen-Probe’s U.S. patent no. 5,030,557, entitled
“Means and Method for Enhancing Nucleic Acid Hybridization
Assays.”
No trial date has been set for either patent infringement case.
There can be no assurances as to the final outcome of the
litigation.
On October 4, 2005, Bayer filed a demand for arbitration
against the Company with the JAMS office in San Francisco,
California related to the Company’s collaboration with
Bayer for nucleic acid diagnostic tests for viral organisms. At
the same time, Bayer filed a civil lawsuit against the Company
in Superior Court of Massachusetts for Middlesex County. In both
the demand for arbitration and the complaint, Bayer alleges that
the Company is developing real-time diagnostic assays for HIV
and HCV that are covered by certain patents, without the
authorization of the patent owner. The subject patents were
issued to Chiron and licensed non-exclusively to Bayer. On
October 17, 2005, the Company removed the state court suit
to federal court in Boston. On October 21, 2005, Bayer
moved to remand the case to the Massachusetts state court. On
October 27, 2005, the Company filed a motion to dismiss the
case. Both motions are under submission for decision by the
court. The Company intends to vigorously defend Bayer’s
allegations. However, there can be no assurance that these
matters will be resolved in the Company’s favor.
F-29
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
| Other |
The Company is obligated to purchase TIGRIS instruments and raw
materials used in manufacturing from two key vendors. The
minimum combined purchase commitment was approximately
$22,582,000 for the year ended December 31, 2005. Of the
$14,420,000 in TIGRIS instruments expected to be purchased, the
Company anticipates that approximately $9,333,000 will be
reimbursed by Chiron.
| 10. | Significant customers and geographic information |
During the years ended December 31, 2005, 2004 and 2003,
52%, 47% and 42%, respectively, of net revenues were from one
customer. No other customer accounted for more than 10% of
revenues in any fiscal year.
During the years ended December 31, 2005, 2004 and 2003,
48%, 43% and 41%, respectively, of product sales were from the
sale of commercially approved blood screening products. Other
revenues related to the development of blood screening products
prior to commercial approval are recorded in collaborative
research revenue as disclosed in Note 9, Commitments and
contingencies (Collaborative agreements). During the years ended
December 31, 2005, 2004 and 2003, 52%, 57% and 59%,
respectively, of product sales were from the sale of clinical
diagnostic products and instruments.
Total revenues by geographic region were as follows (in
thousands):
| Years Ended December 31 | |||||||||||||
| 2005 | 2004 | 2003 | |||||||||||
|
Total revenue:
|
|||||||||||||
|
North America
|
$ | 236,474 | $ | 224,607 | $ | 180,924 | |||||||
|
Rest of World
|
69,491 | 45,100 | 26,267 | ||||||||||
| $ | 305,965 | $ | 269,707 | $ | 207,191 | ||||||||
| 11. | Employee benefit plan |
Effective May 1, 1990, Gen-Probe established a Defined
Contribution Plan (the “Plan”) covering substantially
all employees of Gen-Probe beginning the month after they are
hired. Employees may contribute up to 20% of their compensation
per year (subject to a maximum limit imposed by federal tax
law). Gen-Probe is
obligated to make matching contributions each payroll equal to a
maximum of 50% of the first 6% of compensation contributed by
the employee. The contributions charged to operations related to
Gen-Probe employees totaled $1,384,000, $1,332,000 and
$1,110,000 for the years ended December 31, 2005, 2004 and
2003, respectively.
| 12. | Deferred compensation plan |
In May 2005, the Company’s Board of Directors approved the
adoption of a Deferred Compensation Plan (the “Plan”),
which became effective as of June 30, 2005. The Plan allows
certain highly compensated management, key employees and
directors of the Company to defer up to 80% of annual base
salary or director fees and up to 100% of annual bonus
compensation. Deferred amounts are credited with gains and
losses based on the performance of deemed investment options
selected by a committee appointed by the Board of Directors to
administer the Plan. The Plan also allows for discretionary
contributions to be made by the Company. Participants may
receive distributions upon (i) a pre-set date or schedule
that is elected during an appropriate election period,
(ii) the occurrence of unforeseeable financial emergencies,
(iii) termination of employment (including retirement),
(iv) death, (v) disability, or (vi) a change in
control of the Company, as
F-30
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
defined in the Plan. Certain key participants must wait six
months following termination of employment to receive
distributions. The Plan is subject to Section 409A of the
Code.
The Company may terminate the Plan at any time with respect to
participants providing services to the Company. Upon termination
of the Plan, participants will be paid out in accordance with
their prior distribution elections and otherwise in accordance
with the Plan. Upon and for twelve (12) months following a
change of control, the Company has the right to terminate the
Plan and, notwithstanding any elections made by participants, to
pay out all benefits in a lump sum, subject to the provisions of
the Code. As of December 31, 2005, the Company had
approximately $557,000 of accrued deferred compensation and
these amounts have been classified as accrued salaries and
employee benefits on the face of the balance sheet.
| 13. | Quarterly information (unaudited) |
The following tables set forth the quarterly results of
operations for each quarter within the two-year period ended
December 31, 2005 (in thousands, except per share data).
The information for each of these quarters is unaudited and has
been prepared on the same basis as the Company’s audited
financial statements. In the opinion of management, all
necessary adjustments, consisting only of normal recurring
accruals, have been included to fairly present the unaudited
quarterly results when read in conjunction with the
Company’s audited financial statements and related notes.
The operating results of any quarter are not necessarily
indicative of results for any future period.
| Quarter Ended | |||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | ||||||||||||||
|
2005
|
|||||||||||||||||
|
Total product sales
|
$ | 59,579 | $ | 65,131 | $ | 68,941 | $ | 77,999 | |||||||||
|
Total revenues
|
68,828 | 72,894 | 76,271 | 87,972 | |||||||||||||
|
Cost of product sales
|
15,498 | 20,350 | 21,399 | 26,653 | |||||||||||||
|
Total operating expenses
|
48,798 | 52,922 | 54,282 | 62,996 | |||||||||||||
|
Net income
|
13,461 | 13,456 | 16,417 | 16,755 | |||||||||||||
|
Net income per share:
|
|||||||||||||||||
|
Basic
|
$ | 0.27 | $ | 0.27 | $ | 0.32 | $ | 0.33 | |||||||||
|
Diluted
|
$ | 0.26 | $ | 0.26 | $ | 0.31 | $ | 0.32 | |||||||||
| Quarter Ended | |||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | ||||||||||||||
|
2004
|
|||||||||||||||||
|
Total product sales
|
$ | 55,030 | $ | 52,600 | $ | 56,447 | $ | 58,483 | |||||||||
|
Total revenues
|
76,486 | 61,225 | 63,487 | 68,509 | |||||||||||||
|
Cost of product sales
|
13,864 | 13,164 | 15,272 | 17,608 | |||||||||||||
|
Total operating expenses
|
46,378 | 43,114 | 46,544 | 51,173 | |||||||||||||
|
Net income
|
19,728 | 11,761 | 11,110 | 11,976 | |||||||||||||
|
Net income per share:
|
|||||||||||||||||
|
Basic
|
$ | 0.40 | $ | 0.24 | $ | 0.22 | $ | 0.24 | |||||||||
|
Diluted
|
$ | 0.39 | $ | 0.23 | $ | 0.22 | $ | 0.23 | |||||||||
F-31
Table of Contents
SCHEDULE II — VALUATION AND QUALIFYING
ACCOUNTS
For The Three Years Ended December 31, 2005
(In thousands)
| Addition | |||||||||||||||||
| Balance at | Charged to | Balance at | |||||||||||||||
| Beginning | Cost and | End of | |||||||||||||||
| of Period | Expenses | Deductions(1) | Period | ||||||||||||||
|
Allowance for doubtful accounts:
|
|||||||||||||||||
|
Year Ended December 31, 2005:
|
$ | 664 | $ | 207 | $ | (81 | ) | $ | 790 | ||||||||
|
Year Ended December 31, 2004:
|
$ | 717 | $ | — | $ | (53 | ) | $ | 664 | ||||||||
|
Year Ended December 31, 2003:
|
$ | 787 | $ | (48 | ) | $ | (22 | ) | $ | 717 | |||||||
|
Inventory reserves:
|
|||||||||||||||||
|
Year Ended December 31, 2005:
|
$ | 6,579 | $ | 2,480 | $ | (2,884 | ) | $ | 6,175 | ||||||||
|
Year Ended December 31, 2004:
|
$ | 7,307 | $ | 5,506 | $ | (6,234 | ) | $ | 6,579 | ||||||||
|
Year Ended December 31, 2003:
|
$ | 10,969 | $ | 5,487 | $ | (9,149 | ) | $ | 7,307 | ||||||||
Certain prior year amounts have been reclassified to conform
with the current year presentation.
| (1) | Represents amounts written off against the allowance or reserves, or credited to earnings. |
S-1
Table of Contents
INDEX TO EXHIBITS
| Exhibit | ||||
| Number | Description | |||
| 2 | .1(3) | Separation and Distribution Agreement, dated and effective as of May 24, 2002, and amended and restated as of August 6, 2002, by and between Chugai Pharmaceutical Co., Ltd. and Gen-Probe Incorporated. | ||
| 3 | .1(3) | Form of Amended and Restated Certificate of Incorporation of Gen-Probe Incorporated. | ||
| 3 | .2(14) | Certificate of Amendment of Amended and Restated Certificate of Incorporation of Gen-Probe Incorporated. | ||
| 3 | .3(3) | Form of Amended and Restated Bylaws of Gen-Probe Incorporated. | ||
| 3 | .4(14) | Certificate of Designations of the Series A Junior Participating Preferred Stock of Gen-Probe Incorporated. | ||
| 4 | .1(3) | Specimen common stock certificate. | ||
| 4 | .2(5) | Rights Agreement, dated as of September 16, 2002, between Gen-Probe Incorporated and Mellon Investor Services LLC, which includes the form of Certificate of Designations of the Series A Junior Participating Preferred Stock of Gen-Probe Incorporated as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C. | ||
| 4 | .3(6) | First Amendment to Rights Agreement, dated October 9, 2002, between Gen-Probe Incorporated and Mellon Investor Services LLC. | ||
| 4 | .4(11) | Second Amendment to Rights Agreement, dated November 20, 2003. | ||
| 10 | .1(2) | Transition Services Agreement, dated April 4, 2002, by and between Chugai Pharma USA, LLC and Gen-Probe Incorporated. | ||
| 10 | .2(4) | Form of Tax Sharing Agreement between Chugai Pharma USA, LLC and Gen-Probe Incorporated. | ||
| 10 | .3(13)‡ | The 2000 Equity Participation Plan of Gen-Probe Incorporated. | ||
| 10 | .4(15)‡ | The 2000 Equity Participation Plan Form of Agreement and Grant Notices. | ||
| 10 | .5(13)‡ | The 2002 New Hire Stock Option Plan. | ||
| 10 | .6(15)‡ | The 2002 New Hire Stock Option Plan Form of Agreement and Grant Notice. | ||
| 10 | .7(13)‡ | The 2003 Incentive Award Plan of Gen-Probe Incorporated. | ||
| 10 | .8(15)‡ | The 2003 Incentive Award Plan Form of Agreement and Grant Notice. | ||
| 10 | .9(15)‡ | The 2003 Incentive Award Plan Form of Restricted Stock Award Agreement and Grant Notice. | ||
| 10 | .10(10)‡ | Amendment No. 1 to the 2003 Incentive Award Plan of Gen-Probe Incorporated. | ||
| 10 | .11(14)‡ | Employee Stock Purchase Plan. | ||
| 10 | .12(4) | Agreement dated as of June 11, 1998 between Gen-Probe Incorporated and Chiron Corporation.* | ||
| 10 | .13(4) | Addendum dated June 11, 1998 to Agreement dated as of June 11, 1998 between Gen-Probe Incorporated and Chiron Corporation.* | ||
| 10 | .14(4) | Amendment dated December 7, 1999 to Agreement dated as of June 11, 1998 between Gen-Probe Incorporated and Chiron Corporation. | ||
| 10 | .15(1) | Amendment No. 2 dated February 1, 2000 to Agreement dated as of June 11, 1998 between Gen-Probe Incorporated and Chiron Corporation. | ||
| 10 | .16(4) | Amendment No. 3 effective April 1, 2002 to Agreement dated as of June 11, 1998 between Gen-Probe Incorporated and Chiron Corporation.* | ||
| 10 | .17(9) | Amendment No. 4 effective March 5, 2003 to Agreement dated as of June 11, 1998 between Gen-Probe Incorporated and Chiron Corporation. | ||
| 10 | .18(12) | Amendment No. 5 effective January 1, 2004 to Agreement dated as of June 11, 1998 between Gen-Probe Incorporated and Chiron Corporation. | ||
| 10 | .19(12) | Future Blood Screening Assay — Ultrio Addendum effective January 1, 2001 to the Agreement dated as of June 11, 1998 between Gen-Probe Incorporated and Chiron Corporation.* | ||
| 10 | .20(12) | Future Blood Screening Assay — West Nile Virus Addendum effective June 1, 2003 to the Agreement dated as of June 11, 1998 between Gen-Probe Incorporated and Chiron Corporation.* | ||
Table of Contents
| Exhibit | ||||
| Number | Description | |||
| 10 | .21(1) | Supplemental Agreement dated April 2, 2001 to the Agreement dated June 11, 1998 for Development, Distribution and Licensing of TMA Products between Gen-Probe Incorporated and Bayer.* | ||
| 10 | .22(4) | Amended and Restated ANAIS License, Development and Cooperation Agreement entered into as of August 4, 2000 between Gen-Probe Incorporated and bioMérieux, Inc.* | ||
| 10 | .23(4) | Amended and Restated VIDAS License, Development and Cooperation Agreement entered into as of August 4, 2000 between Gen-Probe Incorporated and bioMérieux, Inc.* | ||
| 10 | .24(1) | Distribution Agreement entered into May 2, 1997 between Gen-Probe Incorporated and bioMérieux S.A.* | ||
| 10 | .25(4) | Distributorship Arrangements Agreement entered into May 2, 1997 between Gen-Probe Incorporated and bioMérieux S.A.* | ||
| 10 | .26(1) | Renewal Amendment entered into November 2, 1999 to the Distribution Agreement and the Distributorship Arrangements Agreement dated May 2, 1997 between Gen-Probe Incorporated and bioMérieux S.A. | ||
| 10 | .27(1) | First Amendment entered into August 4, 2000 to the Renewed Distribution Agreement and the Distributorship Arrangements Agreement dated May 2, 1997 between Gen-Probe Incorporated and bioMérieux S.A.* | ||
| 10 | .28(14) | 2003 Amendment to the Renewed Distribution Agreement and the Distributorship Arrangements Agreement dated May 2, 1997, entered into May 2, 2003 by and between Gen-Probe Incorporated and bioMérieux, S.A.* | ||
| 10 | .29(15) | Ribosomal Nucleic Acid License and Option Agreement (for Easy Q Instrument) dated September 30, 2004 by and between Gen-Probe Incorporated and bioMérieux B.V.* | ||
| 10 | .30(15) | Guarantee Agreement dated September 30, 2004 by bioMérieux SA, on behalf of its subsidiary bioMérieux, Inc. in favor of Gen-Probe Incorporated. | ||
| 10 | .31(15) | Ribosomal Nucleic Acid License and Option Agreement (for GeneXpert Instrument) dated September 30, 2004 by and between Gen-Probe Incorporated and bioMérieux, Inc.* | ||
| 10 | .32(15) | Guarantee Agreement dated September 30, 2004, by bioMérieux SA, on behalf of its subsidiary bioMérieux b.v. in favor of Gen-Probe Incorporated. | ||
| 10 | .33(15) | Side Letter dated October 1, 2004 by and between Gen-Probe Incorporated, bioMérieux B.V., and bioMérieux, Inc.* | ||
| 10 | .34(15) | License Agreement entered into September 30, 2004 by and between Gen-Probe Incorporated and bioMérieux B.V.* | ||
| 10 | .35(15) | Vidas Termination Agreement entered into September 30, 2004 by and between Gen-Probe Incorporated and bioMérieux, Inc.* | ||
| 10 | .36(4) | License Agreement effective as of July 1, 2001 between Gen-Probe Incorporated and Rebio Gen, Inc. (as successor-in-interest to Chugai Diagnostics Science Co., Ltd.).* | ||
| 10 | .37(4) | Distribution Agreement effective as of September 1, 1998 between Gen-Probe Incorporated and Rebio Gen, Inc. (as successor-in-interest to Chugai Diagnostics Science Co., Ltd.).* | ||
| 10 | .38(4) | First Amendment effective June 30, 2002 to September 1, 1998 Distribution Agreement between Gen-Probe Incorporated and Rebio Gen, Inc. (as successor-in-interest to Chugai Diagnostics Science Co., Ltd.).* | ||
| 10 | .39(4) | Co-Exclusive Agreement effective as of April 23, 1997 between Gen-Probe Incorporated and The Board of Trustees of the Leland Stanford Junior University.* | ||
| 10 | .40(1) | Amendment No. 1 effective April, 1998 to the License Agreement effective April 23, 1997 between Stanford University and Gen-Probe Incorporated.* | ||
| 10 | .41(4) | Non-Assertion Agreement effective as of February 7, 1997 between Gen-Probe Incorporated and Organon Teknika B.V.* | ||
| 10 | .42(12) | Agreement effective as of July 12, 1984 between the Welsh National School of Medicine and Bioanalysis Limited.* | ||
| 10 | .43(12) | Agreement effective July 12, 1990 between University of Wales College of Medicine and Molecular Light Technology Limited.* | ||
| 10 | .44(4) | License Agreement effective as of January 21, 1986 among Gen-Probe Incorporated, Bioanalysis, Ltd. And the University of Wales College of Medicine.* | ||
Table of Contents
| Exhibit | ||||
| Number | Description | |||
| 10 | .45(4) | Amendment entered into as of May 11, 1989 to the License Agreement effective as of January 21, 1986 among Gen-Probe Incorporated, Bioanalysis, Ltd. and the University of Wales College of Medicine.* | ||
| 10 | .46(4) | Amendment entered into as of November 19, 1998 to the License Agreement effective as of January 21, 1986 among Gen-Probe Incorporated, Bioanalysis, Ltd. and the University of Wales College of Medicine.* | ||
| 10 | .47(4) | Third Amendment entered into as of February 19, 2002 to the License Agreement effective as of January 21, 1986 among Gen-Probe Incorporated, Bioanalysis, Ltd. And the University of Wales College of Medicine.* | ||
| 10 | .48(12) | Amendment Agreement entered into as of July 8, 2003 related to Certain Licence Agreements between the University of Wales College of Medicine, Bioanalysis Limited and Gen-Probe Incorporated. | ||
| 10 | .49(4) | Non-exclusive License Agreement dated June 22, 1999 between Gen-Probe Incorporated and Vysis, Inc.* | ||
| 10 | .50(15) | Settlement Agreement entered into September 17, 2004 by and between Gen-Probe Incorporated and Vysis, Inc.* | ||
| 10 | .51(15) | Amendment to Nonexclusive License Agreement under Vysis’ Collins Patents entered into September 17, 2004 by and between Gen-Probe Incorporated and Vysis, Inc.* | ||
| 10 | .52(4) | Amended and Restated License Agreement dated June 19, 2002 between Gen-Probe Incorporated and The Public Health Research Institute of The City of New York, Inc.* | ||
| 10 | .53(4) | Development, License and Supply Agreement entered into as of October 16, 2000 between Gen-Probe Incorporated and KMC Systems, Inc.* | ||
| 10 | .54(1) | First Amendment made as of September, 2001 to Agreement entered into as of October 16, 2000 between Gen-Probe Incorporated and KMC Systems, Inc.* | ||
| 10 | .55(1) | Contract effective as of January 1, 2000 between Gen-Probe Incorporated and the National Institutes of Health (No. N01-HB-07148). | ||
| 10 | .56(12) | Modification No. 9 effective as of November 5, 2003 to the Contract effective as of January 1, 2000 between Gen-Probe Incorporated and the National Institutes of Health (No. N01-HB-07148) | ||
| 10 | .57(4) | Supply Agreement effective as of March 5, 1998 between Gen-Probe Incorporated and Boehringer Mannheim GmbH.* | ||
| 10 | .58(1) | First Amendment effective as of February 12, 2001 between Gen-Probe Incorporated and Roche Diagnostics GmbH, the successor-in-interest to Boehringer Mannheim GmbH, to the Supply Agreement effective as of March 5, 1998 between Gen-Probe Incorporated and Boehringer Mannheim GmbH.* | ||
| 10 | .59(16) | Second Amendment effective as of August 31, 2004 between Gen-Probe Incorporated and Roche Diagnostics, the successor-in-interest to Boehringer Mannheim GmbH, to the Supply Agreement effective as of March 5, 1998 between Gen-Probe Incorporated and Boehringer Mannheim GmbH.* | ||
| 10 | .60(12) | License, Development and Cooperation Agreement between Gen-Probe Incorporated and DiagnoCure Inc. effective as of November 19, 2003.* | ||
| 10 | .61(12) | Target License Agreement between Tosoh Corporation and Gen-Probe Incorporated effective as of January 1, 2004.* | ||
| 10 | .62(12) | TRC License Agreement between Tosoh Corporation and Gen-Probe Incorporated effective as of January 1, 2004.* | ||
| 10 | .63(12) | TMA License Agreement between Tosoh Corporation and Gen-Probe Incorporated effective as of January 1, 2004.* | ||
| 10 | .64(14) | Supply Agreement entered into January 1, 2002 by and between Gen-Probe Incorporated and MGM Instruments, Inc.* | ||
| 10 | .65(14) | Supply Agreement Amendment Number One entered into June 4, 2004 by and between Gen-Probe Incorporated and MGM Instruments, Inc.* | ||
| 10 | .66(16) | License Agreement between AdnaGen AG and Gen-Probe Incorporated effective as of December 30, 2004.* | ||
Table of Contents
| Exhibit | ||||
| Number | Description | |||
| 10 | .67(16) | License Agreement between Corixa Corporation and Gen-Probe Incorporated effective as of December 31, 2004.* | ||
| 10 | .68(3) | Credit Agreement dated April 10, 2001, by and between Gen-Probe Incorporated, Gen-Probe Sales & Service, Inc. and Wells Fargo Bank, National Association. | ||
| 10 | .69(3) | First Amendment dated June 10, 2002 to Credit Agreement dated April 10, 2001 by and between Gen-Probe Incorporated, Gen-Probe Sales & Service, Inc. and Wells Fargo Bank, National Association. | ||
| 10 | .70(3) | Revolving Line of Credit Note dated July 1, 2002 made by Gen-Probe Incorporated and Gen-Probe Sales & Service, Inc. in favor of Wells Fargo Bank, National Association. | ||
| 10 | .71(2) | Promissory Note dated September 29, 2000 by Niall M. Conway and Margaret Conway. | ||
| 10 | .72(3)‡ | Form of Indemnification Agreement between Gen-Probe Incorporated and its Executive Officers and Directors. | ||
| 10 | .73(9)‡ | Employment Agreement dated as of April 2, 2003 between Gen-Probe Incorporated and Henry L. Nordhoff. | ||
| 10 | .74(12)‡ | First Amendment to Employment Agreement effective as of January 1, 2004 between Gen-Probe Incorporated and Henry L. Nordhoff. | ||
| 10 | .75(15)‡ | Deferred Issuance Restricted Stock Conversion Agreement, Deferred Issuance Award Agreement and Election Agreement between Gen-Probe Incorporated and Henry L. Nordhoff, dated October 8, 2004. | ||
| 10 | .76‡† | Form of Employment Agreement — Executive Team. | ||
| 10 | .77‡† | Form of Employment Agreement — Vice Presidents. | ||
| 10 | .78(8)‡ | Gen-Probe Incorporated Change-In-Control Severance Compensation Plan for Employees. | ||
| 10 | .79 (17) | Modified Blood Screening Instrument — eSAS 2 Addendum effective January 1, 2002 to the Agreement dated as of June 11, 1998 between Gen-Probe Incorporated and Chiron Corporation.* | ||
| 10 | .80 (17) | Amendment No. 6 effective January 1, 2004 to Agreement dated as of June 11, 1998 between Gen- Probe Incorporation and Chiron Corporation.* | ||
| 10 | .81(17) | Supply and Purchase Agreement between Gen-Probe Incorporated, F. Hoffman-La Roche Ltd. and Roche Molecular Systems, Inc. effective February 15, 2005.* | ||
| 10 | .82(17) ‡ | Amendment dated February 1, 2005 to Deferred Issuance Restricted Stock Conversion Agreement, Deferred Issuance Award Agreement and Election Agreement between Gen-Probe Incorporated and Henry L. Nordhoff, dated October 8, 2004. | ||
| 10 | .83 (18) ‡ | Employment Offer Letter, dated July 15, 2005, between Gen-Probe Incorporated and Stephen J. Kondor. | ||
| 10 | .84 (19) ‡ | Gen-Probe Incorporated Deferred Compensation Plan effective as of June 30, 2005. | ||
| 10 | .85 (19) ‡ | Deferred Issuance Restricted Stock Award Grant Notice and Agreement between Gen-Probe Incorporated and Henry L. Nordhoff, dated May 20, 2005. | ||
| 10 | .86 (20) ‡ | 2003 Incentive Award Plan Form of Restricted Stock Award Agreement and Grant Notice, as amended. | ||
| 10 | .87 (21) | Letter Agreement between Gen-Probe Incorporated and Chiron Corporation, dated June 11, 1998.** | ||
| 21 | .1† | List of subsidiaries of Gen-Probe Incorporated. | ||
| 23 | .1† | Consent of Independent Registered Public Accounting Firm. | ||
| 31 | .1† | Certification dated March 10, 2006, of Principal Executive Officer required pursuant to 18 USC. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 31 | .2† | Certification dated March 10, 2006, of Principal Financial Officer required pursuant to 18 USC. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 32 | .1† | Certification dated March 10, 2006, of Principal Executive Officer required pursuant to 18 USC. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 32 | .2† | Certification dated March 10, 2006, of Principal Financial Officer required pursuant to 18 USC. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. | ||
Table of Contents
| † | Filed herewith. | |
| ‡ | Indicates management contract or compensatory plan, contract or arrangement. |
| (1) | Incorporated by reference to Gen-Probe’s Registration Statement on Form 10 filed with the SEC on May 24, 2002. | |
| (2) | Incorporated by reference to Gen-Probe’s Amendment No. 1 to Registration Statement on Form 10 filed with the SEC on July 29, 2002. | |
| (3) | Incorporated by reference to Gen-Probe’s Amendment No. 2 to Registration Statement on Form 10 filed with the SEC on August 14, 2002. | |
| (4) | Incorporated by reference to Gen-Probe’s Amendment No. 3 to Registration Statement on Form 10 filed with the SEC on September 5, 2002. | |
| (5) | Incorporated by reference to Gen-Probe’s Report on Form 8-K filed with the SEC on September 17, 2002. | |
| (6) | Incorporated by reference to Gen-Probe’s Quarterly Report on Form 10-Q filed with the SEC on November 14, 2002. | |
| (7) | Intentionally omitted. | |
| (8) | Incorporated by reference to Gen-Probe’s Annual Report on Form 10-K filed with the SEC on March 24, 2003. | |
| (9) | Incorporated by reference to Gen-Probe’s Quarterly Report on Form 10-Q filed with the SEC on May 9, 2003. |
| (10) | Incorporated by reference to Gen-Probe’s Report on Form S-8 filed with the SEC on May 29, 2003 |
| (11) | Incorporated by reference to Gen-Probe’s Report on Form 8-K filed with the SEC on November 21, 2003. |
| (12) | Incorporated by reference to Gen-Probe’s Annual Report on Form 10-K filed with the SEC on March 9, 2004 |
| (13) | Incorporated by reference to Gen-Probe’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2004 |
| (14) | Incorporated by reference to Gen-Probe’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2004. |
| (15) | Incorporated by reference to Gen-Probe’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2004. |
| (16) | Incorporated by reference to Gen-Probe’s Annual Report on Form 10-K filed with the SEC on March 15, 2005. |
| (17) | Incorporated by reference to Gen-Probe’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2005. |
| (18) | Incorporated by reference to Gen-Probe’s Report on Form 8-K filed with the SEC on August 1, 2005. |
| (19) | Incorporated by reference to Gen-Probe’s Quarterly Report on Form 10-Q filed with the SEC on August 4, 2005. |
| (20) | Incorporated by reference to Gen-Probe’s Report on Form 8-K filed with the SEC on December 6, 2005. |
| (21) | Incorporated by reference to Gen-Probe’s Report on Form 8-K filed with the SEC on December 8, 2005. |
| * | Gen-Probe has been granted confidential treatment with respect to certain portions of this exhibit. |
| ** | Gen-Probe has requested confidential treatment with respect to certain portions of this exhibit. |