UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2009

OR

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 001-31279

GEN-PROBE INCORPORATED

(Exact Name of Registrant as Specified in Its Charter)

Delaware (State or other jurisdiction of incorporation or organization)		33-0044608 (I.R.S. Employer Identification Number)
10210 Genetic Center Drive San Diego, CA (Address of Principal Executive Offices)		92121 (Zip Code)

(858) 410-8000
(Registrant’s Telephone Number, Including Area Code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller Reporting Company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     As of July 31, 2009, there were 50,337,298 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.

 

 

GEN-PROBE INCORPORATED

TABLE OF CONTENTS
FORM 10-Q

		Page
PART I — FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets			3
Consolidated Statements of Income			4
Consolidated Statements of Cash Flows			5
Notes to Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures about Market Risk			34
Item 4. Controls and Procedures			35
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			37
Item 1A. Risk Factors			37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			52
Item 4. Submission of Matters to a Vote of Security Holders			53
Item 6. Exhibits			54
SIGNATURES			55
EX-10.99
EX-10.100
EX-10.101
EX-31.1
EX-31.2
EX-32.1
EX-32.2

GEN-PROBE INCORPORATED

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

		June 30, 2009				December 31, 2008
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	233,506			$	60,122
Marketable securities			230,698				371,276
Trade accounts receivable, net of allowance for doubtful accounts of $691 and $700 at June 30, 2009 and December 31, 2008, respectively			39,946				33,397
Accounts receivable — other			2,852				2,900
Inventories			56,455				54,406
Deferred income tax			9,136				7,269
Prepaid income tax			6,863				2,306
Prepaid expenses			13,388				15,094
Other current assets			4,322				6,135
Total current assets			597,166				552,905
Marketable securities, net of current portion			105,037				73,780
Property, plant and equipment, net			153,767				141,922
Capitalized software, net			12,858				13,409
Goodwill			90,682				18,621
Deferred income tax, net of current portion			11,837				12,286
Purchased intangible assets, net			57,930				298
Licenses, manufacturing access fees and other assets, net			62,451				56,310
Total assets		$	1,091,728			$	869,531
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	19,477			$	16,050
Accrued salaries and employee benefits			20,534				25,093
Other accrued expenses			10,983				4,027
Income tax payable			1,187				—
Short-term borrowings			240,872				—
Deferred income tax			1,406				—
Deferred revenue			2,204				1,278
Total current liabilities			296,663				46,448
Non-current income tax payable			4,864				4,773
Deferred income tax, net of current portion			14,120				55
Deferred revenue, net of current portion			2,306				2,333
Other long-term liabilities			2,997				2,162
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.0001 par value per share; 20,000,000 shares authorized, none issued and outstanding			—				—
Common stock, $0.0001 par value per share; 200,000,000 shares authorized, 50,581,177 and 52,920,971 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively			5				5
Additional paid-in capital			292,828				382,544
Accumulated other comprehensive income			4,227				3,055
Retained earnings			473,718				428,156
Total stockholders’ equity			770,778				813,760
Total liabilities and stockholders’ equity		$	1,091,728			$	869,531

See accompanying notes to consolidated financial statements.

GEN-PROBE INCORPORATED

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)
(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Revenues:
Product sales		$	116,816			$	113,701			$	229,338			$	215,208
Collaborative research revenue			2,187				4,651				3,862				7,110
Royalty and license revenue			1,542				1,462				3,528				20,059
Total revenues			120,545				119,814				236,728				242,377
Operating expenses:
Cost of product sales (excluding acquisition-related intangibles amortization)			38,280				32,510				71,594				65,146
Acquisition-related intangibles amortization			1,114				—				1,114				—
Research and development			26,069				29,368				51,067				52,434
Marketing and sales			14,015				11,453				25,070				23,361
General and administrative			17,823				13,671				31,670				25,608
Total operating expenses			97,301				87,002				180,515				166,549
Income from operations			23,244				32,812				56,213				75,828
Other income/(expense):
Investment and interest income			10,122				3,900				15,004				8,107
Interest expense			(726	)			(2	)			(877	)			(2	)
Other income/(expense)			(895	)			(191	)			(1,037	)			1,282
Total other income, net			8,501				3,707				13,090				9,387
Income before income tax			31,745				36,519				69,303				85,215
Income tax expense			11,930				11,728				23,741				28,479
Net income		$	19,815			$	24,791			$	45,562			$	56,736
Net income per share:
Basic		$	0.39			$	0.46			$	0.88			$	1.05
Diluted		$	0.38			$	0.45			$	0.87			$	1.03
Weighted average shares outstanding:
Basic			51,285				53,907				51,851				53,859
Diluted			52,061				55,147				52,598				55,093

See accompanying notes to consolidated financial statements.

GEN-PROBE INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
(Unaudited)

		Six Months Ended June 30,
		2009				2008
Operating activities
Net income		$	45,562			$	56,736
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			19,463				17,233
Amortization of premiums on investments, net of accretion of discounts			2,720				3,504
Stock-based compensation			11,405				9,228
Stock-based compensation income tax benefits			310				1,294
Excess tax benefit from stock-based compensation			(702	)			(614	)
Deferred revenue			(255	)			(3,165	)
Deferred income tax			(1,041	)			(821	)
Gain on sale of investment in MPI			—				(1,600	)
Impairment of intangible assets			—				3,496
Loss / (gain) on disposal of property and equipment			69				(1	)
Changes in assets and liabilities:
Trade and other accounts receivable			1,372				3,290
Inventories			3,890				(2,749	)
Prepaid expenses			3,137				5,333
Other current assets			2,081				(1,322	)
Goodwill			856				—
Other long-term assets			(2,486	)			(909	)
Accounts payable			(2,218	)			3,992
Accrued salaries and employee benefits			(7,272	)			(1,732	)
Other accrued expenses			1,337				(9	)
Income tax payable			(3,704	)			(72	)
Other long-term liabilities			335				603
Net cash provided by operating activities			74,859				91,715
Investing activities
Proceeds from sales and maturities of marketable securities			293,504				205,283
Purchases of marketable securities			(189,091	)			(318,558	)
Purchases of property, plant and equipment			(14,666	)			(25,717	)
Capitalization of software development costs			(288	)			—
Purchases of intangible assets, including licenses and manufacturing access fees			(811	)			(315	)
Net cash paid for business combinations			(123,816	)			—
Proceeds from sale of investment in MPI			—				4,100
Cash paid for investment in DiagnoCure and related license fees			(5,250	)			—
Cash paid for Roche manufacturing access fees			—				(10,000	)
Other assets			(289	)			28
Net cash used in investing activities			(40,707	)			(145,179	)
Financing activities
Excess tax benefit from stock-based compensation			702				614
Repurchase and retirement of restricted stock for payment of taxes			(38	)			(479	)
Repurchase and retirement of common stock			(105,577	)			—
Proceeds from issuance of common stock			3,777				10,814
Borrowings under short-term borrowings, net			238,450				—
Net cash provided by financing activities			137,314				10,949
Effect of exchange rate changes on cash and cash equivalents			1,918				14
Net increase (decrease) in cash and cash equivalents			173,384				(42,501	)
Cash and cash equivalents at the beginning of period			60,122				75,963
Cash and cash equivalents at the end of period		$	233,506			$	33,462

See accompanying notes to consolidated financial statements.

Notes to the Consolidated Financial Statements (unaudited)

Note 1 — Summary of significant accounting policies

Basis of presentation

     The accompanying interim consolidated financial statements of Gen-Probe Incorporated (“Gen-Probe” or the “Company”) at June 30, 2009, and for the three and six month periods ended June 30, 2009 and 2008, are unaudited and have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In management’s opinion, the unaudited consolidated financial statements include all adjustments, consisting only of normal recurring accruals, necessary to state fairly the financial information therein, in accordance with U.S. GAAP. Interim results are not necessarily indicative of the results that may be reported for any other interim period or for the year ending December 31, 2009.

     In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 165, “Subsequent Events,” the Company has evaluated for material disclosure and recognition requirements all subsequent events from the balance sheet date of June 30, 2009 through August 6, 2009 and noted no such events.

     Certain prior year amounts have been reclassified to conform to the current year presentation. In the quarter ended March 31, 2009, the Company began reporting investments in an unrealized loss position deemed to be temporary that have a contractual maturity of greater than 12 months as non-current marketable securities. This resulted in the reclassification of $73.8 million of marketable securities as non-current under the caption “Marketable securities, net of current portion” at December 31, 2008.

     These unaudited consolidated financial statements and related footnotes should be read in conjunction with the audited consolidated financial statements and related footnotes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

Principles of consolidation

     The unaudited condensed consolidated financial statements include the accounts of Gen-Probe Incorporated as well as its wholly owned subsidiaries. The Company does not have any interests in any variable interest entities. All material intercompany transactions and balances have been eliminated in consolidation.

     On April 8, 2009, the Company completed its acquisition of Tepnel Life Sciences plc (“Tepnel”), a United Kingdom (“UK”) based international life sciences products and services company. Tepnel’s transplant diagnostics and genetic testing businesses are included in the Company’s diagnostic operations beginning in April 2009. While Tepnel’s research products and services business represents a new area of business for the Company, the activities of the research products and services business were immaterial to the Company’s overall operations for the three months ended June 30, 2009.

Use of estimates

     The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts reported in the consolidated financial statements. These estimates include assessing the collectability of accounts receivable, recognition of revenues, and the valuation of the following: stock-based compensation; marketable securities; equity investments in publicly and privately held companies; income tax; liabilities associated with employee benefit costs; inventories; goodwill and long-lived assets, including patent costs, capitalized software, purchased intangibles and licenses and manufacturing access fees. Actual results could differ from those estimates.

Foreign currencies

     The Company translates the financial statements of its non-US operations using the end-of-period exchange rates for assets and liabilities and the average exchange rates for each reporting period for results of operations. Net gains and losses resulting from the translation of foreign financial statements and the effect of exchange rates on intercompany receivables and payables of a long-term investment nature are recorded as a separate component of stockholders’ equity under the caption “Accumulated other comprehensive income.” These adjustments will affect net income upon the sale or liquidation of the underlying investment.

Fair value of financial instruments

     The carrying value of cash equivalents, marketable securities, accounts receivable, accounts payable and accrued liabilities approximates fair value. See Note 5 for further discussion of fair value.

Marketable securities

     The primary objectives of the Company’s marketable security investment portfolio are liquidity and safety of principal. Investments are made with the goal of achieving the highest rate of return consistent with these two objectives. The Company’s investment policy limits investments to certain types of debt and money market instruments issued by institutions primarily with investment grade credit ratings and places restrictions on maturities and concentration by type and issuer.

     The Company periodically reviews its available-for-sale securities for other-than-temporary declines in fair value below the cost basis, or whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. When assessing marketable securities for other-than-temporary declines in value, the Company considers factors including: the significance of the decline in value compared to the cost basis, the underlying factors contributing to a decline in the prices of securities in a single asset class, how long the market value of the investment has been less than its cost basis, any market conditions that impact liquidity, the views of external investment managers, any news or financial information that has been released specific to the investee and the outlook for the overall industry in which the investee operates.

     The Company does not consider its investments in municipal securities with a current unrealized loss position to be other-than-temporarily impaired at June 30, 2009 since the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost. However, investments in an unrealized loss position deemed to be temporary at June 30, 2009 that have a contractual maturity of greater than 12 months have been classified as non-current marketable securities under the caption “Marketable securities, net of current portion,” reflecting the Company’s current intent and ability to hold such investments to maturity.

Revenue recognition

     The Company records shipments of its clinical diagnostic products as product sales when the product is shipped and title and risk of loss has passed and when collection of the resulting receivable is reasonably assured.

     The Company manufactures blood screening products according to demand specifications of its collaboration partner, Novartis Vaccines and Diagnostics, Inc. (“Novartis”). Upon shipment to Novartis, the Company recognizes blood screening product sales at an agreed upon transfer price and records the related cost of products sold. Based on the terms of the Company’s collaboration agreement with Novartis, the Company’s ultimate share of the net revenue from sales to the end user is not known until reported to the Company by Novartis. The Company then adjusts blood screening product sales upon receipt of customer revenue reports and a net payment from Novartis of amounts reflecting its ultimate share of net sales by Novartis for these products, less the transfer price revenues previously recognized. The Company amended its agreement with Novartis effective as of January 1, 2009 to decrease the time period between product sales and net payment of the Company’s share of blood screening assay revenue from 45 days to 30 days.

     Also included in product sales is the 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 reference laboratories, public health institutions and hospitals without requiring them to purchase the equipment or enter into an equipment lease. Instead, the Company recovers the cost of providing the instrumentation in the amount it charges for its diagnostic assays. The depreciation costs associated with an instrument are charged to cost of product sales on a straight-line basis over the estimated life of the instrument. The costs to maintain these instruments in the field are charged to cost of product sales as incurred.

     The Company sells its instruments to Novartis for use in blood screening and records these instrument sales upon delivery since Novartis is responsible for the placement, maintenance and repair of the units with its customers. The Company also sells instruments to its clinical diagnostics customers and records sales of these instruments upon delivery and receipt of customer acceptance. Prior to delivery, each instrument is tested to meet Company and United States Food and Drug Administration (“FDA”) specifications, and is shipped fully assembled. Customer acceptance of the Company’s clinical diagnostic 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 shipments of its blood screening products in the United States and other countries in which the products have not received regulatory approval as collaborative research revenue. This is done because price restrictions apply to these products prior to FDA marketing approval in the United States and similar approvals in foreign countries. Upon shipment of FDA-approved and labeled products following commercial approval, the Company classifies sales of these products as product sales in its consolidated financial statements.

     The Company records revenue on its research products and services in the period during which the related costs are incurred, or services are provided. These revenues consist of outsourcing services for pharmaceutical, biotechnology, and healthcare industries, including nucleic acid purification and analysis services, as well as the sale of monoclonal antibodies and food testing kits.

     The Company follows the provisions of Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” for multiple element revenue arrangements. EITF Issue No. 00-21 provides guidance on how to determine when an arrangement that involves multiple revenue-generating activities or deliverables should be divided into separate units of accounting for revenue recognition purposes, and if this division is required, how the arrangement consideration should be allocated among the separate units of accounting. If the deliverables in a revenue arrangement constitute separate units of accounting according to the EITF Issue No. 00-21 separation criteria, the revenue-recognition policy must be determined for each identified unit. If the arrangement is a single unit of accounting, the revenue-recognition policy must be determined for the entire arrangement, and all non-refundable upfront license fees are deferred and recognized as revenues on a straight-line basis over the expected term of the Company’s continued involvement in the collaboration.

     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 applicable contracts. Non-refundable license fees are recognized over the related performance period or at the time that the Company has satisfied all performance obligations. Milestone payments are recognized as revenue upon the achievement of specified milestones when (i) the Company has earned the milestone payment, (ii) the milestone is substantive in nature and the achievement of the milestone is not reasonably assured at the inception of the agreement, (iii) the fees are non-refundable, and (iv) performance obligations after the milestone achievement will continue to be funded by the collaborator at a level comparable to the level before the milestone achievement. Any amounts received prior to satisfying the Company’s revenue recognition criteria are recorded as deferred revenue on the consolidated balance sheets.

     Royalty revenue is recognized related to the sale or use of the Company’s products or technologies under license agreements with third parties. For those arrangements where royalties are reasonably estimable, the Company recognizes revenue based on estimates of royalties earned during the applicable period and adjusts for differences between the estimated and actual royalties in the following period. Historically, these adjustments have not been material. For those arrangements where royalties are not reasonably estimable, the Company recognizes revenue upon receipt of royalty statements from the applicable licensee. Non-refundable license fees are recognized over the related performance period or at the time the Company has satisfied all performance obligations.

Adoption of recent accounting pronouncements

SFAS No. 165

     In May 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 165, “Subsequent Events.” The statement does not require significant changes regarding recognition or disclosure of subsequent events, but does require disclosure of the date through which subsequent events have been evaluated for disclosure and recognition. The Company adopted this guidance effective June 30, 2009. Because this statement relates specifically to disclosure requirements, there was no impact on the Company’s consolidated financial statements as a result of its adoption.

FSP SFAS No. 115-2

     In April 2009, the FASB issued Staff Position (“FSP”) SFAS No. 115-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” which became effective for interim and annual periods ending after June 15, 2009. FSP SFAS No. 115-2 modifies the guidance to determine whether the impairment of a debt security is other-than-temporary. This new standard also amends the presentation and disclosure requirements of other-than-temporarily impaired debt and equity securities in the financial statements. The adoption of this statement did not have an effect on the Company’s financial statements since any impairment on marketable securities is not considered to be other-than-temporary.

FSP SFAS No. 107-1

     In April 2009, the FASB issued FSP SFAS No. 107-1 and Accounting Principles Board (“APB”) Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” which the Company adopted on a prospective basis beginning April 1, 2009. This position extends the disclosure requirements of SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to interim financial statements of publicly traded companies. Because this position relates specifically to disclosure requirements, there was no impact on our consolidated financial statements as a result of its adoption.

EITF Issue No. 03-6-1

     In June 2008, the FASB issued Staff Position EITF Issue No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” EITF Issue No. 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore need to be included in the computation of earnings per share under the two-class method as described in SFAS No. 128, “Earnings per Share.” The Company adopted this guidance effective January 1, 2009. There was no material impact on the Company’s consolidated financial statements as a result of the adoption of EITF Issue No. 03-6-1.

SFAS No. 161

     In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.” SFAS No. 161 requires enhanced disclosures regarding derivatives and hedging activities, including: (a) the manner in which an entity uses derivative instruments; (b) the manner in which derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities;” and (c) the effect of derivative instruments and related hedged items on an entity’s financial position, financial performance, and cash flows. The Company adopted this guidance effective January 1, 2009. Because this statement relates specifically to disclosure requirements, there was no impact on the Company’s consolidated financial statements as a result of its adoption.

SFAS No. 141(R)

     In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” SFAS No. 141(R) changes the requirements for an acquirer’s recognition and measurement of the assets acquired and liabilities assumed in a business combination, including the treatment of contingent consideration, pre-acquisition contingencies, transaction costs, in-process research and development and restructuring costs. In addition, under SFAS No. 141(R), changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. The Company adopted this guidance effective January 1, 2009 and applied the accounting for business combinations to the Company’s acquisition of Tepnel. See Note 2 for details on the impact of this statement on current and future operations, changes in estimates and unrecognized tax benefits and liabilities as a result of the Tepnel acquisition.

SFAS No. 160

     In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements (an amendment of Accounting Research Bulletin No. 51).” SFAS No. 160 requires that non-controlling (minority) interests be reported as a component of equity, that net income attributable to the parent and to the non-controlling interest be separately identified in the income statement, that changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions, and that any retained non-controlling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value. This statement is effective for fiscal years beginning after December 31, 2008, and must be applied prospectively. However, the presentation and disclosure requirements of SFAS No. 160 must be applied retrospectively for all periods presented. The retrospective presentation and disclosure requirements of this statement will be applied to any prior periods presented in financial statements for the fiscal year ending December 31, 2009 and later periods during which the Company has a consolidated subsidiary with a non-controlling interest. As of June 30, 2009, the Company does not have any consolidated subsidiaries in which it has a non-controlling interest, and therefore adoption of this statement did not have an impact on the Company’s consolidated financial statements.

EITF Issue No. 07-1

     In November 2007, the FASB ratified EITF Issue No. 07-1, “Accounting for Collaborative Agreements Related to the Development and Commercialization of Intellectual Property.” EITF Issue No. 07-1 defines collaborative agreements as a contractual arrangement in which the parties are active participants to the arrangement and are exposed to the significant risks and rewards that are dependent on the ultimate commercial success of the endeavor. Additionally, it requires that revenue generated and costs incurred on sales to third parties as it relates to a collaborative agreement be recognized as gross or net based on EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent.” Essentially, this requires the party that is identified as the principal participant in a transaction to record the transaction on a gross basis in its financial statements. It also requires payments between participants to be accounted for in accordance with already existing generally accepted accounting principles, unless none exist, in which case a reasonable, rational, consistent method should be used. The Company adopted this guidance effective January 1, 2009 for all collaboration agreements existing as of that date. There was no impact on the Company’s consolidated financial statements as a result of the adoption of EITF Issue No. 07-1.

Pending adoption of recent accounting pronouncements

SFAS No. 168

     In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification^TM and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162,” which establishes the FASB Accounting Standards Codification (the “Codification”). The Codification supersedes all existing accounting standard documents and will become the single source of authoritative non-governmental U.S. GAAP. All other accounting literature not included within the Codification will be considered non-authoritative. The Codification was implemented on July 1, 2009 and will be effective for interim and annual periods ending after September 15, 2009. Because this statement relates specifically to disclosure requirements, the Company does not expect any impact on its consolidated financial statements as a result of its adoption.

Note 2 — Business combination

Acquisition of Tepnel Life Sciences plc

     On April 8, 2009, the Company completed its acquisition of Tepnel, a UK-based international life sciences products and services company, which has two principal businesses, molecular diagnostics and research products and services. The acquisition was consummated pursuant to a court-sanctioned scheme of arrangement under Part 26 of the UK Companies Act 2006. As a result of the acquisition, Tepnel became a wholly owned subsidiary of the Company.

     Upon consummation of the acquisition, each issued ordinary share of Tepnel was cancelled and converted into the right to receive 27.1 pence in cash, or approximately $0.40 based on the exchange rate of £1 to $1.48 as of the closing date. In connection with the acquisition, the holders of issued and outstanding Tepnel capital stock, options and warrants received total net cash of approximately £92.8 million, or approximately $137.1 million based on the exchange rate of £1 to $1.48 as of the closing date. The acquisition was financed through amounts borrowed by the Company under a senior secured revolving credit facility established between the Company and Bank of America, N.A. (“Bank of America”).

     In accordance with SFAS No. 141(R), the acquisition was accounted for as a business combination and, accordingly, the Company has included Tepnel’s results of operations in its consolidated statements of income beginning in April 2009. Neither separate financial statements of Tepnel nor pro forma results of operations have been presented because the acquisition did not meet the quantitative materiality tests under Regulation S-X.

     The purchase price allocation for the acquisition of Tepnel set forth below is preliminary and subject to change as more detailed analysis is completed and additional information with respect to the fair value of the assets and liabilities acquired becomes available. The Company expects to finalize the purchase price allocation during fiscal year 2010. The preliminary allocation of the purchase price for the acquisition of Tepnel is as follows (in thousands):

Total purchase price			137,093
Exchange rate differences			(568	)(1)
Allocated purchase price		$	136,525
Net working capital			15,660
Fixed assets			11,352
Goodwill			70,997
Deferred tax liabilities			(15,599	)
Other intangible assets			57,497
Liabilities assumed			(3,382	)
Allocated purchase price		$	136,525

     The fair values of the acquired identifiable intangible assets with definite lives are as follows (in thousands):

Patents		$	294
Software			441
Customer relationships			45,439
Trademarks / trade names			11,323
		$	57,497

     The amortization periods for the acquired intangible assets with definite lives are as follows: 10 years for patents, five years for software, 12 years for customer relationships, and 20 years for trademarks and trade names. The Company plans to amortize the primary acquired intangible assets, including the customer relationships and trademarks and trade names, using the straight line method of amortization. The Company believes that the use of the straight line method is appropriate given the high customer retention rate of the acquired businesses and the historical and projected growth of revenues and related cash flows. The Company will monitor and assess the acquired customer relationships and will adjust, if necessary, the expected life, amortization method or carrying value of the customer relationships and trademarks and trade names, to best match the underlying economic value. The estimated amortization expense for these assets over future periods is as follows (in thousands):

Years ending December 31,
Second half of 2009		$	2,235
2010			4,470
2011			4,470
2012			4,470
2013			4,470
Thereafter			37,380
Total		$	57,497

     The $137.1 million purchase price exceeded the value of the acquired tangible and identifiable intangible assets, and therefore the Company has allocated $71.0 million to goodwill. Included in this goodwill amount is $15.6 million related to deferred tax liabilities recorded as a result of non-deductible amortization of acquired intangible assets. The Company believes the acquisition of Tepnel will provide access to growth opportunities in transplant diagnostics, genetic testing and pharmaceutical services, as well as accelerate the Company’s ongoing strategic efforts to strengthen its marketing and sales, distribution and manufacturing capabilities in Europe.

     Changes in goodwill for the six months ended June 30, 2009 were as follows (in thousands):

Goodwill balance as of December 31, 2008		$	18,621
Additional goodwill recognized			70,997
Changes due to deferred tax assets/liabilities			90
Changes due to foreign translation			974
Goodwill balance as of June 30, 2009		$	90,682

     At the date of acquisition, the Company assumed UK tax loss carryforwards estimated at $39.9 million. These losses do not expire, but the Company’s ability to utilize these losses depends on its ability to generate future profits in the UK. The Company has established a $6.9 million valuation allowance against the full amount of deferred tax assets arising from these losses as the UK businesses of Tepnel have not yet turned profitable on a consistent basis. If UK profits are earned in future periods and the losses are utilized, any reduction in the valuation allowance will result in an income tax benefit being recorded in the Company’s consolidated statements of income.

     Approximately $3.2 million and $4.8 million of costs associated with the Company’s acquisition of Tepnel have been included in general and administrative expenses for the three and six months ended June 30, 2009, respectively.

Note 3 — Stock-based compensation

     The following table summarizes the stock-based compensation expense that the Company recorded in its consolidated statements of income in accordance with SFAS No. 123(R), “Share-Based Payment,” for the three and six month periods ended June 30, 2009 and 2008 (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Cost of product sales		$	805			$	592			$	1,603			$	1,187
Research and development			1,765				1,266				3,468				2,701
Marketing and sales			779				607				1,538				1,302
General and administrative			2,297				1,571				4,796				4,038
Total		$	5,646			$	4,036			$	11,405			$	9,228

     The Company used the following weighted average assumptions (annualized percentages) to estimate the fair value of options granted under the Company’s equity incentive plans and the shares purchasable under the Company’s Employee Stock Purchase Plan (“ESPP”) for the three and six month periods ended June 30, 2009 and 2008:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Stock Option Plans
Risk-free interest rate			1.7	%			2.6	%			1.6	%			2.7	%
Volatility			36	%			34	%			36	%			34	%
Dividend yield			—				—				—				—
Expected term (years)			4.2				4.2				4.2				4.2
Resulting average fair value		$	13.50			$	17.37			$	13.30			$	17.41
ESPP
Risk-free interest rate			1.3	%			3.3	%			1.3	%			3.3	%
Volatility			47	%			34	%			47	%			34	%
Dividend yield			—				—				—				—
Expected term (years)			0.5				0.5				0.5				0.5
Resulting average fair value		$	12.20			$	14.82			$	12.20			$	14.82

     The Company’s unrecognized stock-based compensation expense, before income taxes and adjusted for estimated forfeitures, related to outstanding unvested share-based payment awards as of June 30, 2009 was approximately as follows:

						Unrecognized
		Weighted Average				Expense as of
		Remaining Expense				June 30, 2009
Awards		Life (In years)				(In thousands)
Options			1.2			$	31,821
ESPP			0.2				187
Restricted Stock			1.7				10,429
Deferred Issuance Restricted Stock			1.6				2,439
						$	44,876

Note 4 — Net income per share

     The Company computes net income per share in accordance with SFAS No. 128, “Earnings Per Share,” and SFAS No. 123(R). Basic net income per share is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income for the period by the weighted average number of common and common equivalent shares outstanding during the period. The Company excludes stock options from the calculation of diluted net income per share when the combined exercise price, average unamortized fair values and assumed tax benefits upon exercise are greater than the average market price for the Company’s common stock because their effect is anti-dilutive.

     The following table sets forth the computation of net income per share for the three and six month periods ended June 30, 2009 and 2008 (in thousands, except per share amounts):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Net income		$	19,815			$	24,791			$	45,562			$	56,736
Weighted average shares outstanding — Basic			51,285				53,907				51,851				53,859
Effect of dilutive common stock options outstanding			776				1,240				747				1,234
Weighted average shares outstanding — Diluted			52,061				55,147				52,598				55,093
Net income per share:
Basic		$	0.39			$	0.46			$	0.88			$	1.05
Diluted		$	0.38			$	0.45			$	0.87			$	1.03

     Dilutive securities include stock options and restricted stock subject to vesting. Potentially dilutive securities totaling approximately 3,541,000 and 1,882,000 shares for the three month periods ended June 30, 2009 and 2008, respectively, and 3,568,000 and 1,908,000 shares for the six month periods ended June 30, 2009 and 2008, respectively, were excluded from the calculation of diluted earnings per share because of their anti-dilutive effect.

Note 5 — Fair value measurements

SFAS No. 157

     Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements,” for financial assets and liabilities. SFAS No. 157 defines fair value, expands disclosure requirements around fair value and specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:

•

Level 1 — Quoted prices for identical instruments in active markets.

•

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

•

Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

     This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

     Set forth below is a description of the Company’s valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy. Where appropriate, the description includes details of the valuation models, the key inputs to those models, as well as any significant assumptions.

Assets and liabilities measured at fair value on a recurring basis:

     The Company’s available-for-sale securities are comprised of tax advantaged municipal securities and money market funds. When available, the Company generally uses quoted market prices to determine fair value, and classifies such items as Level 1. If quoted market prices are not available, prices are determined using prices for recently traded financial instruments with similar underlying terms as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals. The Company classifies such items as Level 2.

     The following table presents the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis (as described above) as of June 30, 2009 (in thousands):

		Fair Value Measurements at June 30, 2009
		Quoted prices in								Significant				Total carrying
		active markets for				Significant other				unobservable				value in the
		identical assets				observable inputs				inputs				consolidated
		(Level 1)				(Level 2)				(Level 3)				balance sheet
Assets:
Cash equivalents		$	—			$	168,237			$	—			$	168,237
Marketable securities			—				335,735				—				335,735
Other investments (1)			—				4,737				—				4,737
Total assets at fair value			—				508,709				—				508,709
Liabilities:
Other investments (1)			—				4,936				—				4,936
Total liabilities at fair value		$	—			$	4,936			$	—			$	4,936

Assets and liabilities measured at fair value on a non-recurring basis:

     Certain assets and liabilities are measured at fair value on a non-recurring basis and therefore are not included in the table above. Such instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

Equity investment in public company

     In April 2009, the Company made a $5.0 million preferred stock investment in DiagnoCure, Inc. (“DiagnoCure”), a publicly held company traded on the Toronto Stock Exchange. The Company’s equity investment was valued initially based on the transaction price under the cost method of accounting. The market value of the underlying common stock is the most observable value of the preferred stock, but because there is no active market for these preferred shares the Company has classified its equity investment in DiagnoCure as Level 2 in the fair value hierarchy. The Company’s investment in DiagnoCure, which totaled $5.0 million as of June 30, 2009, is included in “Licenses, manufacturing access fees and other assets, net” on the Company’s consolidated balance sheets.

Equity investment in private company

     In 2006, the Company invested in Qualigen, Inc. (“Qualigen”), a private company. The valuation of investments in non-public companies requires significant management judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such assets. The Company’s equity investments in private companies are valued initially based upon the transaction price under the cost method of accounting. Equity investments in non-public companies are classified as Level 3 in the fair value hierarchy. The Company’s investment in Qualigen, which totaled approximately $5.4 million as of June 30, 2009, is included in “Licenses, manufacturing access fees and other assets, net” on the consolidated balance sheets.

     The Company records impairment charges when an investment has experienced a decline that is deemed to be other-than-temporary. The determination that a decline is other-than-temporary is, in part, subjective and influenced by many factors. Future adverse changes in market conditions or poor operating results of investees could result in losses or an inability to recover the carrying value of the investments, thereby possibly requiring impairment charges in the future. When assessing investments in private companies for an other-than-temporary decline in value, the Company considers many factors, including, but not limited to, the following: the share price from the investee’s latest financing round, the performance of the investee in relation to its own operating targets and its business plan, the investee’s revenue and cost trends, the investee’s liquidity and cash position, including its cash burn rate, and market acceptance of the investee’s products and services. From time to time, the Company may consider third party evaluations or valuation reports. The Company also considers new products and/or services that the investee may have forthcoming, any significant news specific to the investee, the investee’s competitors and/or industry and the outlook of the overall industry in which the investee operates. In the event the Company’s judgments change as to other-than temporary declines in value, the Company may record an impairment loss, which could have an adverse effect on its results of operations. During the third quarter of 2008, the Company recorded an impairment charge of $1.6 million against its investment in Qualigen.

SFAS No. 159

     Effective January 1, 2008, the Company adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.”

     SFAS No. 159 provides companies the irrevocable option to measure many financial assets and liabilities at fair value with changes in fair value recognized in earnings. The Company has not elected to measure any financial assets or liabilities at fair value that were not previously required to be measured at fair value.

Note 6 — Balance sheet information

     The following tables provide details of selected balance sheet items as of June 30, 2009 and December 31, 2008 (in thousands):

Inventories

		June 30,				December 31,
		2009				2008
Raw materials and supplies		$	10,114			$	8,529
Work in process			21,744				24,945
Finished goods			24,597				20,932
		$	56,455			$	54,406

Property, plant and equipment, net

		June 30,				December 31,
		2009				2008
Land		$	19,258			$	18,804
Building			80,391				80,426
Machinery and equipment			174,364				153,211
Building improvements			42,241				34,592
Furniture and fixtures			17,241				16,270
Construction in-progress			558				19
Property, plant and equipment, at cost			334,053				303,322
Less accumulated depreciation and amortization			(180,286	)			(161,400	)
Property, plant and equipment, net		$	153,767			$	141,922

Purchased intangible assets, net

		June 30,				December 31,
		2009				2008
Purchased intangible assets, at cost		$	92,566			$	33,636
Less accumulated amortization			(34,636	)			(33,338	)
Purchased intangible assets, net		$	57,930			$	298

Licenses, manufacturing access fees and other assets, net

		June 30,				December 31,
		2009				2008
Patents		$	14,596			$	13,962
Licenses and manufacturing access fees			59,595				64,507
Investment in Qualigen			5,404				5,404
Investment in DiagnoCure			5,000				—
Other assets			6,097				3,611
Licenses and manufacturing access fees and other assets, at cost			90,692				87,484
Less accumulated amortization			(28,241	)			(31,174	)
Licenses and manufacturing access fees and other assets, net		$	62,451			$	56,310

Other accrued expenses

		June 30,				December 31,
		2009				2008
Royalties		$	3,181			$	985
Professional fees			2,923				1,494
Warranty			821				923
Other			4,058				625
Other accrued expenses		$	10,983			$	4,027

Note 7 — Marketable securities

     The Company’s available-for-sale securities include tax advantaged municipal securities with a minimum Moody’s credit rating of A3 and a minimum Standard & Poor’s credit rating of A-. As of June 30, 2009, the Company did not hold auction rate securities. The Company’s investment policy limits the effective maturity on individual securities to six years and an average portfolio maturity to three years. At June 30, 2009, the Company’s portfolios had an average term of three years and an average credit quality of AA2 as defined by Moody’s.

     The following is a summary of the Company’s marketable securities as of June 30, 2009 (in thousands):

						Gross				Gross
		Amortized				Unrealized				Unrealized				Estimated
		Cost				Gains				Losses				Fair Value
Municipal securities		$	334,114			$	2,143			$	(522	)		$	335,735

     The following table shows the estimated fair values and gross unrealized losses for the Company’s investments in individual securities that have been in a continuous unrealized loss position deemed to be temporary for less than 12 months and for more than 12 months as of June 30, 2009 (in thousands):

		Less than 12 Months								More than 12 Months
		Estimated				Unrealized				Estimated				Unrealized
		Fair Value				Losses				Fair Value				Losses
Municipal securities		$	92,149			$	(227	)		$	17,681			$	(295	)

     The unrealized losses on certain of the Company’s investments in municipal securities were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investments. The Company does not consider its investments in municipal securities with a current unrealized loss position to be other-than-temporarily impaired at June 30, 2009 since the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost. However, investments in an unrealized loss position deemed to be temporary at June 30, 2009 that have a contractual maturity of greater than 12 months have been classified as non-current marketable securities under the caption “Marketable securities, net of current portion,” reflecting the Company’s current intent and ability to hold such investments to maturity.

     The following table shows the current and non-current classification of the Company’s marketable securities as of June 30, 2009 and December 31, 2008 (in thousands):

		June 30,				December 31,
		2009				2008
Current		$	230,698			$	371,276
Non-current			105,037				73,780
Total municipal securities		$	335,735			$	445,056

     When assessing marketable securities for other-than-temporary declines in value, the Company considers factors including: the significance of the decline in value compared to the cost basis; the underlying factors contributing to a decline in the prices of securities in a single asset class; how long the market value of the investment has been less than its cost basis; any market conditions that impact liquidity; the views of external investment managers; any news or financial information that has been released specific to the investee; and the outlook for the overall industry in which the investee operates.

     The following table shows the gross realized gains and losses from the sale of marketable securities, based on the specific identification method, for the three and six month periods ended June 30, 2009 and 2008 (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Proceeds from sale of marketable securities		$	197,284			$	14,862			$	270,943			$	29,267
Gross realized gains		$	6,644			$	89			$	8,516			$	407
Gross realized losses			(28	)			(22	)			(455	)			(22	)
Net realized gain		$	6,616			$	67			$	8,061			$	385

Note 8 — Short-term borrowings

     In February 2009, the Company entered into a credit agreement with Bank of America, which provided for a one-year senior secured revolving credit facility in an amount of up to $180.0 million that is subject to a borrowing base formula. The revolving credit facility has a sub-limit for the issuance of letters of credit in a face amount of up to $10.0 million. Advances under the revolving credit facility are intended to be used to consummate the Company’s acquisition of Tepnel and for other general corporate purposes. At the Company’s option, loans accrue interest at a per annum rate based on, either: the base rate (the base rate is defined as the greatest of (i) the federal funds rate plus a margin equal to 0.50%, (ii) Bank of America’s prime rate and (iii) the London Interbank Offered Rate (“LIBOR”) plus a margin equal to 1.00%); or LIBOR plus a margin equal to 0.60%, in each case for interest periods of 1, 2, 3 or 6 months as selected by the Company. In connection with the credit agreement, the Company also entered into a security agreement, pursuant to which the Company secured its obligations under the credit agreement with a first priority security interest in the securities, cash and other investment property held in specified accounts maintained by Merrill Lynch, Pierce, Fenner & Smith Incorporated, an affiliate of Bank of America.

     In March 2009, the Company borrowed $170.0 million under the revolving credit facility in anticipation of funding the Company’s acquisition of Tepnel. Also in March 2009, the Company and Bank of America amended the credit agreement to increase the amount that the Company can borrow from time to time under the credit agreement from $180.0 million to $250.0 million.

     In April 2009, the Company borrowed an additional $70.0 million under its revolving credit facility with Bank of America and used approximately $137.1 million of such borrowings (based on the then applicable exchange rate) to fund the Company’s acquisition of Tepnel. As of June 30, 2009, the total principal amount outstanding under the revolving credit facility was $240.0 million.

     In connection with the execution of the credit agreement with Bank of America, the Company terminated the commitments under its unsecured bank line of credit with Wells Fargo Bank, N.A., effective as of February 27, 2009. There were no amounts outstanding under the Wells Fargo Bank line of credit as of the termination date.

     As a result of the Tepnel acquisition, the Company assumed Tepnel’s pre-existing fixed rate term loan, which accrues interest at an effective rate of 6.6%. As of June 30, 2009, the outstanding principal amount under this loan was £0.5 million, or $0.9 million based on the exchange rate of £1 to $1.65 as of the balance sheet date. The Company intends to pay off this debt within the next 12 months.

Note 9 — Income tax

     As of June 30, 2009, the Company had total gross unrecognized tax benefits of $6.5 million. The amount of unrecognized tax benefits (net of the federal benefit for state taxes) that would favorably affect the Company’s effective income tax rate, if recognized, was $4.9 million. Material filings subject to future examination are the Company’s California returns filed for the 2005 through 2007 tax years, and the U.S. federal returns filed for the 2006 and 2007 tax years.

Note 10 — Stockholders’ equity

     Changes in stockholders’ equity for the six months ended June 30, 2009 were as follows (in thousands):

Balance at December 31, 2008		$	813,760
Net income			45,562
Other comprehensive income, net			1,172
Proceeds from the issuance of common stock			1,700
Proceeds from the issuance of common stock through ESPP			2,077
Proceeds from the issuance of common stock to board members			90
Repurchase and retirement of common stock			(105,577	)
Repurchase and retirement of restricted stock for payment of taxes			(38	)
Stock-based compensation			11,330
Excess tax benefit from stock-based compensation			702
Balance at June 30, 2009		$	770,778

Comprehensive income

     In accordance with SFAS No. 130, “Reporting Comprehensive Income,” all components of comprehensive income, including net income, are reported in the consolidated financial statements in the period in which they are recognized. Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net income and other comprehensive income, which includes certain changes in stockholders’ equity, such as foreign currency translation of the Company’s wholly owned subsidiaries’ financial statements and unrealized gains and losses on available-for-sale securities, are reported, net of their related tax effect, to arrive at comprehensive income.

     Components of comprehensive income, net of income tax, for the three and six month periods ended June 30, 2009 and 2008 were as follows (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Net income, as reported		$	19,815			$	24,791			$	45,562			$	56,736
Other comprehensive (loss) income:
Foreign currency translation adjustment			3,419				9				3,359				84
Change in net unrealized gain on available-for-sale securities during the period			(311	)			(2,758	)			3,053				(1,275	)
Reclassification adjustments:
Net realized gains on available-for-sale securities			(4,300	)			(44	)			(5,240	)			(250	)
Total other comprehensive (loss) income, net			(1,192	)			(2,793	)			1,172				(1,441	)
Comprehensive income		$	18,623			$	21,998			$	46,734			$	55,295

Stock options

     A summary of the Company’s stock option activity during the six months ended June 30, 2009 for all equity incentive plans is as follows (in thousands, except price per share data and number of years):

										Weighted
										Average
										Remaining				Aggregate
		Number of				Weighted Average				Contractual				Intrinsic
		Shares				Exercise Price				Life (Years)				Value
Outstanding at December 31, 2008			5,657			$	44.12
Granted			267				42.29
Exercised			(85	)			20.05
Cancelled			(71	)			54.22
Outstanding at June 30, 2009			5,768			$	44.26				4.6			$	31,723
Exercisable at June 30, 2009			3,855			$	38.91				4.1			$	31,128

Restricted Stock

     A summary of the Company’s restricted stock activity during the six months ended June 30, 2009 for all equity incentive plans is as follows (in thousands, except price per share data):

						Weighted
						Average
		Number of				Grant-Date
		Shares				Fair Value
Unvested at December 31, 2008			294			$	57.51
Granted			22				43.72
Vested and exercised			(10	)			50.10
Forfeited			(6	)			52.04
Unvested at June 30, 2009			300			$	56.87

Stock Repurchase Program

     In August 2008, the Company’s Board of Directors authorized the repurchase of up to $250.0 million of the Company’s common stock over the two years following adoption of the program, through negotiated or open market transactions. There is no minimum or maximum number of shares to be repurchased under the program. During the three months ended June 30, 2009, the Company repurchased and retired approximately 1,602,000 shares under this program at an average price of $43.66, or approximately $70.0 million in total. As of June 30, 2009, the Company has repurchased and retired approximately 4,182,000 shares since the program’s inception at an average price of $43.17, or approximately $180.5 million in total. When stock is repurchased and retired, the amount paid in excess of par value is recorded to additional paid-in capital.

Note 11 — Contingencies

     The Company is a party to the following litigation and may be involved in other litigation in the ordinary course of business. The Company intends to vigorously defend its interests in these matters. The Company expects that the resolution of these matters will not have a material adverse effect on its business, financial condition or results of operations. However, due to the uncertainties inherent in litigation, no assurance can be given as to the outcome of these proceedings.

Digene Corporation

     In December 2006, Digene Corporation (“Digene”) filed a demand for binding arbitration against F. Hoffmann-La Roche Ltd. and Roche Molecular Systems, Inc. (together, “Roche”) with the International Centre for Dispute Resolution of the American Arbitration Association in New York (“ICDR”). In July 2007, the ICDR arbitrators granted the Company’s petition to join the arbitration. Digene’s arbitration demand challenged the validity of the February 2005 supply and purchase agreement between the Company and Roche. Under the supply and purchase agreement, Roche manufactures and supplies the Company with human papillomavirus (“HPV”) oligonucleotide products. Digene’s demand asserted, among other things, that Roche materially breached a cross-license agreement between Roche and Digene by granting the Company an improper sublicense and sought a determination that the supply and purchase agreement is null and void.

     On April 1, 2009, a three-member arbitration panel from the ICDR issued an interim award rejecting all claims asserted by Digene in the arbitration proceeding brought by Digene against the Company and the Company’s co-respondents Roche. The interim award remains subject to further proceedings related to its implementation, including requests by the Company and Roche for reimbursement of attorneys’ fees and related expenses.

Note 12 — Derivative financial instruments

     The Company enters into foreign currency forward contracts to reduce its exposure to foreign currency fluctuations of certain assets and liabilities denominated in foreign currencies. These forward contracts have a maturity of approximately 30 days and have not been designated as hedges in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activity.” Accordingly, these instruments are marked to market at each balance sheet date with changes in fair value recognized in earnings under the caption “other income/(expense).”

     The following table reflects the effect of these derivative instruments on the consolidated statements of income for the three and six month periods ended June 30, 2009 and 2008 (in thousands):

						Three Months Ended								Six Months Ended
		Location of gain/(loss)				June 30,								June 30,
Derivatives not designated as hedging instruments under SFAS No. 133:		recognized in income				2009				2008				2009				2008
Foreign currency forward contracts		Other income/(expense)				$	(897	)		$	—			$	(635	)		$	—

     The Company did not have any foreign currency forward contracts outstanding at June 30, 2009.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This report contains “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995, which provides a “safe harbor” for these types of statements. To the extent statements in this report involve, without limitation, our expectations for growth, estimates of future revenue, expenses, profit, cash flow, balance sheet items or any other guidance on future periods, these statements are forward-looking statements. Forward-looking statements can be identified by the use of forward-looking words such as “believes,” “expects,” “hopes,” “may,” “will,” “plans,” “intends,” “estimates,” “could,” “should,” “would,” “continue,” “seeks” or “anticipates,” or other similar words, including their use in the negative. Forward-looking statements are not guarantees of performance. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to differ materially from any results, level of activity, performance or achievements expressed or implied by any forward-looking statement. We assume no obligation to update any forward-looking statements.

     The following information should be read in conjunction with our June 30, 2009 consolidated financial statements and related notes included elsewhere in this quarterly report and with our consolidated financial statements and related notes for the year ended December 31, 2008 and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2008. We also urge you to review and consider our disclosures describing various risks that may affect our business, which are set forth under the heading “Risk Factors” in this quarterly report and in our Annual Report on Form 10-K for the year ended December 31, 2008.

Overview

     We are a global leader in the development, manufacture and marketing of rapid, accurate and cost-effective nucleic acid probe-based products used for the clinical diagnosis of human diseases and for screening donated human blood. We also develop and manufacture nucleic acid probe-based products for the detection of harmful organisms in the environment and in industrial processes. We have over 25 years of research and development experience in nucleic acid detection, and our products, which are based on our patented nucleic acid testing, or NAT, technology, are used daily in clinical laboratories and blood collection centers throughout the world.

     We have achieved strong growth in both revenues and earnings since we became a public company in 2002, primarily due to the success of our clinical diagnostic products for sexually transmitted diseases, or STDs, and blood screening products that are used to detect the presence of human immunodeficiency virus (type 1), or HIV-1, hepatitis C virus, or HCV, hepatitis B virus, or HBV, and West Nile Virus, or WNV. Under our collaboration agreement with Novartis Vaccines and Diagnostics, Inc., or Novartis, formerly known as Chiron Corporation, or Chiron, we manufacture blood screening products, while Novartis is responsible for marketing, sales and service of those products, which Novartis sells under its trademarks.

     On April 8, 2009, we completed the acquisition of Tepnel Life Sciences plc (now Gen-Probe Life Sciences Ltd.) and its subsidiaries, or Tepnel, a UK-based international life sciences products and services company which has two principal businesses, molecular diagnostics and research products and services. We believe the acquisition of Tepnel will provide us access to growth opportunities in transplant diagnostics, genetic testing and pharmaceutical services, as well as accelerate our ongoing strategic efforts to strengthen our marketing and sales, distribution and manufacturing capabilities in Europe. The results of Tepnel’s operations have been included in our consolidated financial statements beginning in April 2009.

Recent Events

     Financial Results

     Product sales for the second quarter of 2009 were $116.8 million, compared to $113.7 million in the same period of the prior year, an increase of 3%. Total revenues for the second quarter of 2009 were $120.5 million, compared to $119.8 million in the same period of the prior year, an increase of 1%. Net income for the second quarter of 2009 was $19.8 million ($0.38 per diluted share), compared to $24.8 million ($0.45 per diluted share) in the same period of the prior year, a decrease of 20%.

     Product sales for the first six months of 2009 were $229.3 million, compared to $215.2 million in the same period of the prior year, an increase of 7%. Total revenues for the first six months of 2009 were $236.7 million, compared to $242.4 million in the same period of the prior year, a decrease of 2%. Net income for the first six months of 2009 was $45.6 million ($0.87 per diluted share), compared to $56.7 million ($1.03 per diluted share) in the same period of the prior year, a decrease of 20%.

     Our total revenues, net income and fully diluted earnings per share in the first six months of 2009 included $8.2 million of one-time revenue associated with the renegotiation of our collaboration agreement with Novartis, as well as Tepnel’s results of operations which were not included in the comparable prior year period. In contrast, the first six months of 2008 included $16.4 million of royalty and license revenue associated with the settlement payment received from Bayer (now Siemens Healthcare Diagnostics) which was recorded in the first quarter of 2008.

     Acquisition of Tepnel Life Sciences plc

     In April 2009, we completed our acquisition of Tepnel. The acquisition was consummated pursuant to a court-sanctioned scheme of arrangement under Part 26 of the UK Companies Act 2006. As a result of the acquisition, Tepnel became a wholly owned subsidiary of Gen-Probe Incorporated.

     Upon consummation of the acquisition, each issued ordinary share of Tepnel was cancelled and converted into the right to receive 27.1 pence in cash, or approximately $0.40 based on the exchange rate of £1 to $1.48 as of the closing date. In connection with the acquisition, the holders of issued and outstanding Tepnel capital stock, options and warrants received total net cash of approximately £92.8 million, or approximately $137.1 million based on the exchange rate of £1 to $1.48 as of the closing date. The acquisition was financed through amounts borrowed under a senior secured revolving credit facility established with Bank of America, N.A., or Bank of America.`

     Amended Collaboration Agreement with DiagnoCure Inc.

     In April 2009, we and DiagnoCure, Inc., or DiagnoCure, entered into an amendment to the License, Development and Cooperation Agreement originally signed by the parties on November 19, 2003.

     Pursuant to the amendment, we agreed to use our commercially reasonable efforts to obtain United States Food and Drug Administration, or FDA, approval of specified PCA3 assays and to file an application with the FDA for regulatory approval of a PCA3 assay in the United States by a specified date. In addition, we agreed to make annual payments of $0.5 million to DiagnoCure until specific milestones are met. After our cumulative net sales of licensed products exceed $50.0 million, half of the annual payments may be applied against future royalties due and payable to DiagnoCure under our agreement with DiagnoCure.

     In addition, pursuant to the terms of the amendment, in April 2009 we paid $5.0 million to purchase 4.9 million shares of newly issued DiagnoCure preferred stock, which is convertible, in whole or in part at our election, into DiagnoCure common stock.

     Credit Agreement

     In February 2009, we entered into a credit agreement with Bank of America, which provided for a one-year senior secured revolving credit facility in an amount of up to $180.0 million that is subject to a borrowing base formula. The revolving credit facility has a sub-limit for the issuance of letters of credit in a face amount of up to $10.0 million. Advances under the revolving credit facility are intended to be used to consummate our acquisition of Tepnel and for other general corporate purposes. At our option, loans accrue interest at a per annum rate based on, either: the base rate (the base rate is defined as the greatest of (i) the federal funds rate plus a margin equal to 0.50%, (ii) Bank of America’s prime rate and (iii) the London Interbank Offered Rate, or LIBOR, plus a margin equal to 1.00%); or LIBOR plus a margin equal to 0.60%, in each case for interest periods of 1, 2, 3 or 6 months as selected by us. In connection with the credit agreement, we also entered into a security agreement, pursuant to which we secured our obligations under the credit agreement with a first priority security interest in the securities, cash and other investment property held in specified accounts maintained by Merrill Lynch, Pierce, Fenner & Smith Incorporated, an affiliate of Bank of America.

     In March 2009, we borrowed $170.0 million under the revolving credit facility in anticipation of funding the acquisition of Tepnel. Also in March 2009, we amended the credit agreement with Bank of America to increase the amount that we may borrow from time to time under the credit agreement from $180.0 million to $250.0 million.

     In April 2009, we borrowed an additional $70.0 million under the revolving credit facility with Bank of America and used approximately $137.1 million of such borrowings (based on the then applicable exchange rate) to fund our acquisition of Tepnel. As of June 30, 2009, the total principal amount outstanding under the revolving credit facility was $240.0 million.

     In connection with the execution of the credit agreement with Bank of America, we terminated the commitments under our unsecured bank line of credit with Wells Fargo Bank, N.A., effective as of February 27, 2009. There were no amounts outstanding under this line of credit as of the termination date.

     Corporate Collaboration with Novartis

     In January 2009, we entered into an agreement, referred to herein as Amendment No. 11, with Novartis to amend the June 11, 1998 collaboration agreement, or the 1998 Agreement, between the parties. The effective date of Amendment No. 11 is January 1, 2009. Amendment No. 11 extends to June 30, 2025 the term of our blood screening collaboration with Novartis under the 1998 Agreement. The 1998 Agreement was scheduled to expire by its terms in 2013.

     The 1998 Agreement provided that we were solely responsible for manufacturing costs incurred in connection with the collaboration, while Novartis was responsible for sales and marketing expenses associated with the collaboration. Amendment No. 11 provides that, effective January 1, 2009, we will recover 50% of our cost of product sales incurred in connection with the collaboration, which is recorded in the form of revenue. In addition, we will receive a percentage of the blood screening assay revenue generated under the collaboration, as described below.

     The 1998 Agreement provided that we share revenue from the sale of blood screening assays under the collaboration with Novartis. Under the terms of the 1998 Agreement, as previously amended, our share of revenue from any assay that included a test for HCV was 45.75%. Amendment No. 11 modifies our share of such revenues, initially reducing it to 44% in 2009. Our share of blood screening assay revenue increases in subsequent years as follows: 2010-2011, 46%; 2012-2013, 47%; 2014, 48%; and 2015, 50%. Our share of blood screening assay revenue is fixed at 50% from January 1, 2015 though the remainder of the amended term of the agreement. Under Amendment No. 11, our share of blood screening assay revenue from any assay that does not test for HCV remains at 50%. Amendment No. 11 also provides that Novartis will reduce the amount of time between product sales and payment of our share of blood screening assay revenue from 45 days to 30 days. This reduction in reporting time allowed us to eliminate one month of the reporting lag for net revenues resulting in an $8.2 million one-time benefit in the first quarter of 2009.

     As part of Amendment No. 11, Novartis has agreed to provide certain funding to customize our Panther instrument, a fully automated molecular testing platform now in development, for use in the blood screening market. Novartis has also agreed to pay us a milestone payment upon the first commercial sale of the Panther instrument. The parties will equally share any profit attributable to Novartis’ sale or lease of Panther instruments under the collaboration. The parties have also agreed to evaluate, using our technologies, the development of companion diagnostics for current or future Novartis medicines. Novartis has agreed to provide us with certain funding in support of initial research and development.

     Stock Repurchase Program

     In August 2008, our Board of Directors authorized the repurchase of up to $250.0 million of our common stock over the two years following adoption of the program, through negotiated or open market transactions. There is no minimum or maximum number of shares to be repurchased under the program. During the three months ended June 30, 2009, we repurchased and retired approximately 1,602,000 shares under this program at an average price of $43.66, or approximately $70.0 million in total. From its inception through June 30, 2009, we have repurchased and retired approximately 4,182,000 shares under this program at an average price of $43.17, or approximately $180.5 million in total.

Critical accounting policies and estimates

     Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, the collectability of accounts receivable, and the valuation of the following: stock-based compensation; marketable securities; equity investments in publicly and privately held companies; income tax; liabilities associated with employee benefit costs; inventories; goodwill and long-lived assets, including patent costs, capitalized software, purchased intangibles and licenses and manufacturing access fees. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, which form the basis for making judgments about the carrying values of assets and liabilities. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual results may differ from these estimates.

     We believe there have been no significant changes during the second quarter of 2009 to the items that we disclosed as our critical accounting policies and estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2008, except for the items discussed below.

     Marketable securities

     The primary objectives of our marketable security investment portfolio are liquidity and safety of principal. Investments are made with the goal of achieving the highest rate of return consistent with these two objectives. Our investment policy limits investments to certain types of debt and money market instruments issued by institutions primarily with investment grade credit ratings and places restrictions on maturities and concentration by type and issuer.

     We periodically review our available-for-sale securities for other-than-temporary declines in fair value below the cost basis, or whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. When assessing marketable securities for other-than-temporary declines in value, we consider factors including: the significance of the decline in value compared to the cost basis; the underlying factors contributing to a decline in the prices of securities in a single asset class; how long the market value of the investment has been less than its cost basis; any market conditions that impact liquidity; the views of external investment managers; any news or financial information that has been released specific to the investee; and the outlook for the overall industry in which the investee operates.

     We do not consider our investments in municipal securities with a current unrealized loss position to be other-than-temporarily impaired at June 30, 2009 since we do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost. However, investments in an unrealized loss position deemed to be temporary at June 30, 2009 that have a contractual maturity of greater than 12 months have been classified as non-current marketable securities under the caption “Marketable securities, net of current portion,” reflecting our current intent and ability to hold such investments to maturity.

     Adoption of recent accounting pronouncements

     EITF Issue No. 07-1

     Effective January 1, 2009, we adopted Emerging Issues Task Force, or EITF, Issue No. 07-1, “Accounting for Collaborative Agreements Related to the Development and Commercialization of Intellectual Property.” EITF Issue No. 07-1 defines collaborative agreements as a contractual arrangement in which the parties are active participants to the arrangement and are exposed to the significant risks and rewards that are dependent on the ultimate commercial success of the endeavor. Additionally, it requires that revenue generated and costs incurred on sales to third parties as it relates to a collaborative agreement be recognized as gross or net based on EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent.” Essentially, this requires the party that is identified as the principal participant in a transaction to record the transaction on a gross basis in its financial statements. It also requires payments between participants to be accounted for in accordance with already existing generally accepted accounting principles, unless none exist, in which case a reasonable, rational, consistent method should be used. The adoption of this statement did not have an impact on our consolidated financial statements, as all agreements were in compliance with this standard prior to its adoption.

     SFAS No. 160

     Effective January 1, 2009, we adopted Statement of Financial Accounting Standards, or SFAS, No. 160, “Non-controlling Interests in Consolidated Financial Statements (an amendment of Accounting Research Bulletin No. 51).” SFAS No. 160 requires that non-controlling (minority) interests be reported as a component of equity, that net income attributable to the parent and to the non-controlling interest be separately identified in the income statement, that changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions, and that any retained non-controlling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value. As of June 30, 2009, we did not have any consolidated subsidiaries in which we had a non-controlling interest, and therefore adoption of this statement did not have an impact on our consolidated financial statements.

     SFAS No. 141(R)

     Effective January 1, 2009, we adopted SFAS No. 141(R), “Business Combinations.” SFAS No. 141(R) changes the requirements for an acquirer’s recognition and measurement of the assets acquired and liabilities assumed in a business combination, including the treatment of contingent consideration, pre-acquisition contingencies, transaction costs, in-process research and development and restructuring costs. In addition, under SFAS No. 141(R), changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. See Note 2 — Business combination, of the Notes to the Consolidated Financial Statements included in Item 1 of Part I of this report for the impact of the adoption of SFAS No. 141(R) on our financial results as of June 30, 2009.

     SFAS No. 161

     Effective January 1, 2009, we adopted SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.” SFAS No. 161 requires enhanced disclosures regarding derivatives and hedging activities, including: (a) the manner in which an entity uses derivative instruments; (b) the manner in which derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities;” and (c) the effect of derivative instruments and related hedged items on an entity’s financial position, financial performance, and cash flows. Because this statement relates specifically to disclosure requirements, there was no impact on our consolidated financial statements as a result of its adoption.

     EITF Issue No. 03-6-1

     Effective January 1, 2009, we adopted Financial Accounting Standards Board, or FASB, Staff Position EITF Issue No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” EITF Issue No. 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore need to be included in the computation of earnings per share under the two-class method as described in SFAS No. 128, “Earnings per Share.” There was no material impact on our consolidated financial statements as a result of the adoption of EITF Issue No. 03-6-1.

     FSP SFAS No. 115-2

     Effective April 1, 2009, we adopted FASB Staff Position, or FSP, SFAS No. 115-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” FSP SFAS No. 115-2 modifies the guidance to determine whether the impairment of a debt security is other-than-temporary. This new standard also amends the presentation and disclosure requirements of other-than-temporarily impaired debt and equity securities in the financial statements. The adoption of this statement did not have an effect on our consolidated financial statements since any impairment on marketable securities is not considered to be other-than-temporary.

     FSP SFAS No. 107-1

     Effective April 1, 2009, we adopted FSP SFAS No. 107-1 and Accounting Principles Board, or APB, Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” FSP SFAS No. 107-1 extends the disclosure requirements of SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to interim financial statements of publicly traded companies. Because this position relates specifically to disclosure requirements, there was no impact on our consolidated financial statements as a result of its adoption.

     SFAS No. 165

     Effective June 30, 2009, we adopted SFAS No. 165, “Subsequent Events.” The standard does not require significant changes regarding recognition or disclosure of subsequent events, but does require disclosure of the date through which subsequent events have been evaluated for disclosure and recognition. Because this statement relates specifically to disclosure requirements, there was no impact on our consolidated financial statements as a result of its adoption.

     Pending adoption of recent accounting pronouncements

     SFAS No. 168

     In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification^TM and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162,” which establishes the FASB Accounting Standards Codification, or the Codification. The Codification supersedes all existing accounting standard documents and will become the single source of authoritative non-governmental U.S. GAAP. All other accounting literature not included in the Codification will be considered non-authoritative. The Codification was implemented on July 1, 2009 and will be effective for interim and annual periods ending after September 15, 2009. Because this statement relates specifically to disclosure requirements, we do not expect any impact on our consolidated financial statements as a result of its adoption.

Results of Operations

Product Sales

(Dollars in millions)		Three Months Ended June 30,																Six Months Ended June 30,
		2009				2008				$ Change				% Change				2009				2008				$ Change				% Change
Clinical diagnostics		$	67.8			$	57.2			$	10.6				19	%		$	127.4			$	109.7			$	17.7				16	%
Blood screening			45.8				56.5				(10.7	)			(19	)%			98.7				105.5				(6.8	)			(6	)%
Research products and services			3.2				—				3.2				N/M				3.2				—				3.2				N/M
Product Sales		$	116.8			$	113.7			$	3.1				3	%		$	229.3			$	215.2			$	14.1				7	%
As a percent of total revenues			97	%			95	%											97	%			89	%

     Our primary source of revenue comes from product sales, which consist primarily of the sale of clinical diagnostic and blood screening products in the United States and throughout the world. Our clinical diagnostic product sales consist primarily of our APTIMA, PACE, AccuProbe and Amplified Mycobacterium Tuberculosis Direct Test product lines, as well as sales of transplant diagnostics and genetic testing products acquired as part of our recent acquisition of Tepnel, which are primarily sold under the LIFEMATCH and Elucigene trademarks. The principal customers for our clinical diagnostics products include reference laboratories, public health institutions and hospitals. The blood screening assays and instruments we manufacture are marketed and distributed worldwide through our collaboration with Novartis under the Procleix and Ultrio trademarks.

     We recognize product sales from the manufacture and shipment of tests for screening donated blood at the contractual transfer prices specified in our collaboration agreement with Novartis for sales to end-user blood bank facilities located in countries where our products have obtained governmental approvals. Blood screening product sales are then adjusted monthly corresponding to Novartis’ payment to us of amounts reflecting our ultimate share of net revenue from sales by Novartis to the end user, less the transfer price revenues previously recorded. Net sales are ultimately equal to the sales of the assays by Novartis to third parties, less freight, duty and certain other adjustments specified in our collaboration agreement with Novartis multiplied by our share of the net revenue.

     Product sales increased by 3% and 7% in the three and six months ended June 30, 2009, respectively, as compared to the same periods of 2008. In each case, the increase was primarily attributed to additional product sales as a result of our recent acquisition of Tepnel and higher APTIMA assay sales, partially offset by lower blood screening sales, primarily due to lower shipments and unfavorable exchange rate impacts.

     Diagnostic product sales

     The increase in diagnostic product sales in the three and six months ended June 30, 2009 compared to the same periods of the prior year is primarily attributed to the addition of transplant diagnostic and genetic testing product sales resulting from our acquisition of Tepnel, volume gains in our APTIMA product line as the result of PACE conversions, market share gains we attribute to the superior clinical performance of our APTIMA assays, and the availability of our fully automated TIGRIS instrument.

     In general, the price of our amplified APTIMA test is twice that of our non-amplified PACE product, thus the conversion from PACE to APTIMA drives an overall increase in product sales even if underlying testing volumes remain the same.

     During the three and six months ended June 30, 2009, diagnostic product sales were negatively affected by unfavorable estimated exchange rate impacts of $1.2 million and $2.7 million, respectively, due to a stronger United States dollar.

     Blood screening related sales

     The decrease in blood screening related sales in the three and six months ended June 30, 2009 compared to the same periods of the prior year is primarily attributed to test demand fluctuations from our partner Novartis. Second quarter 2008 blood screening test demand and the related shipment of tests was $8.8 million higher than the second quarter of 2009, primarily associated with higher WNV test demand and the additional tests required for the Ultrio post-marketing yield study which concluded at the end of 2008, as well as lower shipments of the Procleix Ultrio HIV-1/HCV assay in the six months ended June 30, 2009 as customers prepare to adopt the Procleix Ultrio assay. In addition, in the prior year period we recorded $2.6 million related to historical revenue adjustments as a result of our amended collaboration agreement with Novartis.

     During the three and six months ended June 30, 2009, blood screening related product sales were negatively affected by unfavorable estimated exchange rate impacts of $3.1 million and $5.8 million, respectively, due to a stronger United States dollar.

     Research Products and Services

     As a result of our acquisition of Tepnel, we have a new category of product sales, which we refer to as “Research products and services.” These sales represent outsourcing services for pharmaceutical, biotechnology, and healthcare industries, including nucleic acid purification and analysis services, as well as the sale of monoclonal antibodies and food testing kits. These sales totaled $3.2 million for the three and six months ended June 30, 2009.

Collaborative research revenue

(Dollars in millions)		Three Months Ended June 30,																Six Months Ended June 30,
		2009				2008				$ Change				% Change				2009				2008				$ Change				% Change
Collaborative Research Revenue		$	2.2			$	4.6			$	(2.4	)			(52	)%		$	3.9			$	7.1			$	(3.2	)			(45	)%
As a percent of total revenues			2	%			4	%											2	%			3	%

     We recognize collaborative research revenue over the term of various collaboration agreements, as negotiated monthly contracted amounts are earned, in relative proportion to the performance required under the contracts, or as reimbursable costs are incurred related to those agreements. Non-refundable license fees are recognized over the related performance period or at the time that we have satisfied all performance obligations. Milestone payments are recognized as revenue upon the achievement of specified milestones. In addition, we record as collaborative research revenue shipments of blood screening products in the United States and other countries in which the products have not received regulatory approval. This is done because restrictions apply to these products prior to FDA marketing approval in the United States and similar approvals in foreign countries.

     The costs associated with collaborative research revenue are based on fully burdened full-time equivalent rates and are reflected in our consolidated statements of income under the captions “Research and development,” “Marketing and sales” and “General and administrative,” based on the nature of the costs. We do not separately track all of the costs applicable to collaborations and, therefore, are not able to quantify all of the direct costs associated with collaborative research revenue.

     Collaborative research revenue decreased 52% and 45% in the three and six months ended June 30, 2009, respectively, as compared to the same periods of 2008. In each case, the decrease was primarily due to $2.7 million of previously deferred milestone revenue received in the prior year period from 3M Corporation, or 3M, related to our healthcare-associated infection collaboration which ended in June 2008, partially offset by increased reimbursements from Novartis for shared development expenses, primarily attributable to development efforts for the Panther instrument.

     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 revenue, results in any one period are not necessarily indicative of results to be achieved in the future. Our ability to generate additional collaborative research revenue depends, in part, on our ability to initiate and maintain relationships with potential and current collaborative partners and the advancement of related collaborative research and development.

Royalty and license revenue

(Dollars in millions)		Three Months Ended June 30,																Six Months Ended June 30,
		2009				2008				$ Change				% Change				2009				2008				$ Change				% Change
Royalty and License Revenue		$	1.5			$	1.5			$	—				0	%		$	3.5			$	20.1			$	(16.6	)			(83	)%
As a percent of total revenues			1	%			1	%											1	%			8	%

     We recognize revenue for royalties due to us upon the manufacture, sale or use of our products or technologies under license agreements with third parties. For those arrangements where royalties are reasonably estimable, we recognize revenue based on estimates of royalties earned during the applicable period and adjust for differences between the estimated and actual royalties in the following period. Historically, these adjustments have not been material. For those arrangements where royalties are not reasonably estimable, we recognize revenue upon receipt of royalty statements from the applicable licensee. Non-refundable license fees are recognized over the related performance period or at the time that we have satisfied all performance obligations.

     Royalty and license revenue in the second quarter of 2009 was unchanged compared to the second quarter of 2008.

     Royalty and license revenue decreased 83% in the first six months of 2009 compared to the same period of the prior year. The $16.6 million decrease was primarily due to the $16.4 million settlement payment received from Bayer during the first quarter of 2008. Bayer has now paid all amounts due to us under our settlement agreement.

     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 commercialize our technologies.

Cost of product sales

(Dollars in millions)		Three Months Ended June 30,																Six Months Ended June 30,
		2009				2008				$ Change				% Change				2009				2008				$ Change				% Change
Cost of Product Sales		$	38.3			$	32.5			$	5.8				18	%		$	71.6			$	65.1			$	6.5				10	%
Gross profit margin as a percent of product sales			67	%			71	%											69	%			70	%

     Cost of product sales includes direct material, direct labor, and manufacturing overhead associated with the production of inventories. Other components of cost of product sales include royalties, warranty costs, instrument and software amortization and allowances for scrap. Cost of product sales excludes the amortization of acquisition-related intangibles.

     In addition, we manufacture significant quantities of materials, development lots, and clinical trial lots of product prior to receiving approval from the FDA for commercial sale. The majority of costs associated with development lots are classified as research and development, or R&D, expense. The portion of a development lot that is manufactured for commercial sale outside the United States is capitalized to inventory and classified as cost of product sales upon shipment.

     Our blood screening manufacturing facility has operated, and we expect that it will continue to operate for the foreseeable future, below its potential capacity. A portion of this available capacity is utilized for R&D activities as new product offerings are developed for commercialization. As a result, certain operating costs of our blood screening manufacturing facility, together with other manufacturing costs for the production of pre-commercial development lot assays that are delivered under the terms of an Investigational New Drug, or IND, application are classified as R&D expense prior to FDA approval.

     Cost of sales increased 18% in the second quarter of 2009 compared to the second quarter of 2008. The $5.8 million increase was primarily due to an additional $4.4 million in cost of product sales as a result of our recent acquisition of Tepnel and an increase of $3.0 million attributed to manufacturing variances related to changes in production volumes, partially offset by a decrease of $2.9 million attributed to lower blood screening shipment volume.

     Cost of sales increased 10% in the six months ended June 30, 2009, compared to the same period of the prior year. The $6.5 million increase was primarily due to an additional $4.4 million in cost of product sales as a result of our recent acquisition of Tepnel, an increase of $4.7 million attributed to manufacturing variances related to changes in production volumes and an increase of $1.7 million related to increased APTIMA sales, partially offset by a decrease of $3.5 million attributed to lower blood screening shipment volume and a decrease of $3.5 million related to lower instrument sales and instrument related costs.

     Our gross profit margin as a percentage of product sales decreased to 67% and 69% in the three and six months ended June 30, 2009, respectively, from 71% and 70% during the same periods of 2008. The decreases in gross profit margin percentages were principally attributed to the following:

	•		lower overall gross margin percentages for the recently acquired Tepnel business;
	•		an increase in cost of sales related to changes in production volumes; and
	•		an increase in the amortization of intellectual property associated with the commercialization of our CE-marked APTIMA HPV assay; partially offset by
	•		an increase in instrumentation margins.

     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 is also affected by manufacturing efficiencies, allowances for scrap or expired materials, additional costs related to initial production quantities of new products after achieving FDA approval, and contractual adjustments, such as instrumentation costs, instrument service costs and royalties.

     A portion of our blood screening revenues is attributable to sales of TIGRIS instruments to Novartis, which totaled $4.8 million and $6.9 million during the first six months of 2009 and 2008, respectively. Under our collaboration agreement with Novartis, we sell TIGRIS instruments to them at prices that approximate cost and share in profits of end-user sales in the United States. These instrument sales, therefore, negatively impact our gross margin percentage in the periods when they occur, but are a necessary precursor to increased sales of blood screening assays in the future.

     We believe certain blood screening markets are trending from pooled testing of large numbers of donor samples to smaller pool sizes. A greater number of tests will be required in markets where smaller pool sizes are used. The greater number of tests required for smaller pool sizes will increase our variable manufacturing costs, including costs of raw materials and labor. In 2008, we were responsible for 100% of the cost of product sales pursuant to our collaboration agreement with Novartis. Effective January 1, 2009, our amended collaboration agreement with Novartis provides that we will recover 50% of our cost of product sales incurred in connection with the collaboration, which is recorded in the form of revenue. If the price per donor or total sales volume does not increase in line with the increase in our total variable manufacturing costs, our gross profit margin percentage from sales of blood screening assays will decrease upon adoption by a customer of smaller pool sizes. We have already observed this trend with respect to certain sales internationally. We are not able to predict accurately the ultimate extent to which our gross profit margin percentage will be negatively affected as a result of smaller pool sizes, because we do not know the ultimate selling price that Novartis will charge to the end user or the degree to which smaller pool size testing will be adopted across the markets in which we sell our products.

Acquisition-related intangibles amortization

(Dollars in millions)		Three Months Ended June 30,																Six Months Ended June 30,
		2009				2008				$ Change				% Change				2009				2008				$ Change				% Change
Acquisition-related intangibles amortization		$	1.1			$	—			$	1.1				N/M			$	1.1			$	—			$	1.1				N/M
As a percent of total revenues			1	%			0	%											0	%			0	%

     Amortization expense related to purchased intangible assets was $1.1 million during the three and six months ended June 30, 2009 as a result of our acquisition of Tepnel. Intangible assets are amortized using the straight-line method over their estimated useful lives, which range from 10 to 20 years. For details on the intangible assets acquired as part of our acquisition of Tepnel, please refer to Note 2 — Business combination, of the Notes to the Consolidated Financial Statements included in Item 1 of Part I of this report.

Research and development

(Dollars in millions)		Three Months Ended June 30,																Six Months Ended June 30,
		2009				2008				$ Change				% Change				2009				2008				$ Change				% Change
Research and Development		$	26.1			$	29.4			$	(3.3	)			(11	)%		$	51.1			$	52.4			$	(1.3	)			(2	)%
As a percent of total revenues			22	%			25	%											22	%			22	%

     We invest significantly in R&D as part of our ongoing efforts to develop new products and technologies. Our R&D expenses include the development of proprietary products and instrument platforms, as well as expenses related to the development of new products and technologies in collaboration with our partners. R&D spending is dependent on the status of projects under development and may vary substantially between quarterly or annual reporting periods.

We expect to incur additional costs associated with our research and development activities. The additional costs include the development and validation activities for our PCA3 and HPV assays, development of our Panther instrument, our fully automated system for low and mid-volume laboratories, assay integration activities for Panther, development and validation of assays for blood screening and ongoing research and early stage development activities. Although total R&D expenditures may increase over time, we expect that our R&D expenses as a percentage of total revenues will decline in future years.

     R&D expenses decreased 11% in the second quarter of 2009 compared to the second quarter of 2008. The $3.3 million decrease was primarily due to a $3.5 million impairment charge recorded in the second quarter of 2008 associated with our Corixa license agreement.

     R&D expenses decreased 3% in the six months ended June 30, 2009 compared to the same period of the prior year. The $1.4 million decrease was primarily due to a $3.5 million impairment charge recorded in the second quarter of 2008 associated with our Corixa license agreement, partially offset by increased spending for clinical evaluations and outside services associated with our HPV clinical trial.

Marketing and sales

(Dollars in millions)		Three Months Ended June 30,																Six Months Ended June 30,
		2009				2008				$ Change				% Change				2009				2008				$ Change				% Change
Marketing and Sales		$	14.0			$	11.4			$	2.6				23	%		$	25.1			$	23.4			$	1.7				7	%
As a percent of total revenues			12	%			10	%											11	%			10	%