e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended March 31, 2009 |
OR
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o |
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Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 |
Commission File Number 001-31279
GEN-PROBE INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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33-0044608 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification Number) |
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10210 Genetic Center Drive |
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San Diego, CA
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92121 |
(Address of Principal Executive
Offices)
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(Zip Code) |
(858) 410-8000
(Registrants 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):
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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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 April 30, 2009, there were 52,073,804 shares of the registrants common stock, par value
$0.0001 per share, outstanding.
GEN-PROBE INCORPORATED
TABLE OF CONTENTS
FORM 10-Q
2
GEN-PROBE INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
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March 31, |
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December 31, |
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2009 |
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2008 |
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(unaudited) |
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ASSETS |
Current assets: |
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Cash and cash equivalents |
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$ |
286,195 |
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$ |
60,122 |
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Marketable securities current |
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366,395 |
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371,276 |
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Trade accounts receivable, net of allowance for doubtful accounts of $600 and
$700 at March 31, 2009 and December 31, 2008, respectively |
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35,206 |
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33,397 |
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Accounts receivable other |
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1,886 |
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2,900 |
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Inventories |
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52,175 |
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54,406 |
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Deferred income tax short term |
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5,965 |
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7,269 |
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Prepaid income tax |
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2,306 |
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Prepaid expenses |
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14,144 |
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15,094 |
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Other current assets |
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5,699 |
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6,135 |
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Total current assets |
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767,665 |
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552,905 |
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Marketable securities non-current |
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32,677 |
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73,780 |
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Property, plant and equipment, net |
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142,799 |
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141,922 |
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Capitalized software, net |
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12,780 |
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13,409 |
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Goodwill |
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18,621 |
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18,621 |
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Deferred income tax long term |
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12,286 |
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12,286 |
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Licenses, manufacturing access fees and other assets, net |
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56,483 |
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56,608 |
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Total assets |
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$ |
1,043,311 |
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$ |
869,531 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities: |
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Accounts payable |
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$ |
15,788 |
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$ |
16,050 |
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Accrued salaries and employee benefits |
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19,434 |
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25,093 |
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Other accrued expenses |
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6,239 |
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4,027 |
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Income tax payable |
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8,491 |
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Short-term borrowings |
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170,000 |
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Deferred revenue short term |
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1,592 |
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1,278 |
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Total current liabilities |
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221,544 |
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46,448 |
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Non-current income tax payable |
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4,671 |
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4,773 |
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Deferred income tax long term |
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54 |
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55 |
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Deferred revenue long term |
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2,167 |
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2,333 |
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Deferred compensation plan liabilities |
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2,244 |
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2,162 |
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Commitments and contingencies |
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Stockholders equity: |
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Preferred stock, $0.0001 par value per share; 20,000,000 shares authorized, none
issued and outstanding |
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Common stock, $0.0001 par value per share; 200,000,000 shares authorized,
52,068,633 and 52,920,971 shares issued and outstanding at March 31, 2009
and December 31, 2008, respectively |
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5 |
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5 |
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Additional paid-in capital |
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353,304 |
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382,544 |
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Accumulated other comprehensive income |
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5,419 |
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3,055 |
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Retained earnings |
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453,903 |
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428,156 |
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Total stockholders equity |
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812,631 |
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813,760 |
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Total liabilities and stockholders equity |
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$ |
1,043,311 |
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$ |
869,531 |
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See accompanying notes to consolidated financial statements.
3
GEN-PROBE INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
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Three Months Ended |
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March 31, |
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2009 |
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2008 |
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Revenues: |
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Product sales |
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$ |
112,522 |
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$ |
101,507 |
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Collaborative research revenue |
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1,675 |
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2,459 |
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Royalty and license revenue |
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1,986 |
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18,597 |
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Total revenues |
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116,183 |
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122,563 |
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Operating expenses: |
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Cost of product sales |
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33,314 |
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32,636 |
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Research and development |
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24,998 |
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23,066 |
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Marketing and sales |
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11,055 |
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11,908 |
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General and administrative |
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13,846 |
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11,937 |
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Total operating expenses |
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83,213 |
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79,547 |
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Income from operations |
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32,970 |
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43,016 |
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Other income/(expense): |
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Interest income |
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4,882 |
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4,207 |
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Interest expense |
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(151 |
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Other income/(expense) |
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(142 |
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1,473 |
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Total other income, net |
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4,589 |
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5,680 |
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Income before income tax |
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37,559 |
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48,696 |
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Income tax expense |
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11,812 |
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16,751 |
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Net income |
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$ |
25,747 |
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$ |
31,945 |
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Net income per share: |
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Basic |
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$ |
0.49 |
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$ |
0.59 |
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Diluted |
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$ |
0.48 |
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$ |
0.58 |
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Weighted average shares outstanding: |
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Basic |
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52,407 |
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53,796 |
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Diluted |
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53,126 |
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55,023 |
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See accompanying notes to consolidated financial statements.
4
GEN-PROBE INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Three Months Ended |
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March 31, |
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2009 |
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2008 |
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Operating activities |
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Net income |
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$ |
25,747 |
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$ |
31,945 |
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Adjustments to reconcile net income to net cash provided by operating
activities: |
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Depreciation and amortization |
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8,748 |
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8,608 |
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Amortization of premiums on investments, net of accretion of discounts |
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1,523 |
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1,735 |
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Stock-based compensation charges |
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5,758 |
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5,192 |
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Stock-based compensation income tax benefits |
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126 |
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369 |
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Excess tax benefit from stock-based compensation |
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(127 |
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(145 |
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Gain on sale of investment in MPI |
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(1,600 |
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Changes in assets and liabilities: |
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Trade and other accounts receivable |
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(784 |
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3,842 |
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Inventories |
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2,223 |
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(1,796 |
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Prepaid expenses |
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945 |
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3,447 |
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Other current assets |
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436 |
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(1,161 |
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Other long term assets |
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(1,161 |
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(743 |
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Accounts payable |
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(219 |
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3,181 |
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Accrued salaries and employee benefits |
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(5,657 |
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(3,069 |
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Other accrued expenses |
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2,217 |
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965 |
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Income tax payable |
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10,709 |
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15,663 |
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Deferred revenue |
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147 |
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(45 |
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Deferred income tax |
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1,305 |
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688 |
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Deferred rent |
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(10 |
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Deferred compensation plan liabilities |
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82 |
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454 |
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Net cash provided by operating activities |
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52,018 |
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67,520 |
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Investing activities |
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Proceeds from sales and maturities of marketable securities |
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84,008 |
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97,290 |
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Purchases of marketable securities |
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(37,124 |
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(181,546 |
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Purchases of property, plant and equipment |
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(7,525 |
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(20,033 |
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Purchase of intangible assets, including licenses and manufacturing access fees |
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(205 |
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(194 |
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Proceeds from sale of investment in MPI |
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4,100 |
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Other assets |
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(13 |
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75 |
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Net cash provided by (used in) investing activities |
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39,141 |
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(100,308 |
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Financing activities |
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Excess tax benefit from stock-based compensation |
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127 |
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145 |
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Repurchase and retirement of restricted stock for payment of taxes |
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(34 |
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(41 |
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Repurchases of common stock |
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(35,627 |
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Proceeds from issuance of common stock |
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534 |
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3,027 |
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Borrowings under credit facility |
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170,000 |
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Net cash provided by financing activities |
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135,000 |
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3,131 |
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Effect of exchange rate changes on cash and cash equivalents |
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(86 |
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(7 |
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Net increase (decrease) in cash and cash equivalents |
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226,073 |
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(29,664 |
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Cash and cash equivalents at the beginning of period |
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60,122 |
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75,963 |
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Cash and cash equivalents at the end of period |
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$ |
286,195 |
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$ |
46,299 |
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See accompanying notes to consolidated financial statements.
5
Notes to the Consolidated Financial Statements (unaudited)
Note 1 Summary of significant accounting policies
Basis of presentation
The accompanying interim consolidated financial statements of Gen-Probe Incorporated
(Gen-Probe or the Company) at March 31, 2009, and for the three month periods ended March 31,
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 managements 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.
Certain prior year amounts have
been reclassified to conform with the current year presentation. In the first quarter of 2009, the Company began reporting
those investments with a contractual maturity of greater than 12 months and that are in an unrealized loss position deemed
to be temporary as non-current marketable securities. This reclassification resulted in $73.8 million in non-current
marketable securities at December 31, 2008.
These unaudited consolidated financial statements and footnotes thereto should be read in
conjunction with the audited consolidated financial statements and footnotes thereto contained in
the Companys Annual Report on Form 10-K for the year ended December 31, 2008.
Principles of consolidation
The consolidated financial statements of the Company include the accounts of the Company and
its subsidiaries, Gen-Probe Sales & Service, Inc., Gen-Probe International, Inc., Gen-Probe UK
Limited (GP UK Limited), Gen-Probe Italia S.r.l., Gen-Probe Deutschland GmbH and Molecular Light
Technology Limited (MLT) and MLTs subsidiaries. All intercompany transactions and balances have
been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the amounts reported in the consolidated financial
statements. These estimates include assessing the collectability of accounts receivable,
recognition of revenues, and the valuation of the following: stock-based compensation, marketable
securities, equity investments in privately held companies, income tax, liabilities associated with
employee benefit costs, inventories, goodwill and long-lived assets, including patent costs,
capitalized software and licenses and manufacturing access fees. Actual results could differ from
those estimates.
Foreign currencies
The functional currency of the Companys wholly owned subsidiaries GP UK Limited and MLT and
its subsidiaries is the British pound. The functional currency of Gen-Probe Italia S.r.l. and
Gen-Probe Deutschland GmbH is the Euro. Accordingly, balance sheet accounts of these subsidiaries
are translated into United States dollars using the exchange rate in effect at the balance sheet
date, and revenues and expenses are translated using the average exchange rates in effect during
the period. The gains and losses from foreign currency translation of the financial statements of
these subsidiaries are recorded directly as a separate component of stockholders equity under the
caption Accumulated other comprehensive income.
Marketable securities
The primary objectives for the Companys marketable security investment portfolio are
liquidity and safety of principal. Investments are made with the objective of achieving the highest
rate of return consistent with these two objectives. The Companys 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 reviews its available-for-sale securities for other than temporary declines in
fair value below the cost basis periodically and whenever events or changes in 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
March 31, 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, those investments with
a contractual maturity of greater than 12 months and that are in an unrealized loss position deemed to be temporary at
March 31, 2009 have been classified as non-current marketable securities.
6
Revenue recognition
The Company records shipments of its clinical diagnostic products as product sales when the
product is shipped and title and risk of loss has passed and when collection of the resulting
receivable is reasonably assured.
The Company manufactures 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 Companys collaboration
agreement with Novartis, the Companys ultimate share of the net revenue from sales to the end user
is not known until reported to the Company by Novartis. The Company then adjusts blood screening
product sales upon receipt of customer revenue reports and a net payment from Novartis of amounts
reflecting its ultimate share of net sales by Novartis of these products, less the transfer price
revenues previously recognized. The Company amended its
agreement with Novartis effective as of January 1, 2009 to decrease the time between product sales and payment of the Companys
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
Companys 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
Companys clinical diagnostic instrument systems requires installation and training by the
Companys technical service personnel. Generally, installation is a standard process consisting
principally of uncrating, calibrating, and testing the instrumentation.
The Company records as collaborative research revenue shipments of its blood screening
products in the United States and other countries in which the products have not received
regulatory approval. This is done because price restrictions apply to these products prior to FDA
marketing approval in the United States and similar approvals in foreign countries. Upon shipment
of FDA-approved and labeled products following commercial approval, the Company classifies sales of
these products as product sales in its consolidated financial statements.
The Company follows the provisions of Emerging Issues Task Force (EITF) Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables, for multiple element revenue arrangements. EITF
Issue No. 00-21 provides guidance on how to determine when an arrangement that involves multiple
revenue-generating activities or deliverables should be divided into separate units of accounting
for revenue recognition purposes, and if this division is required, how the arrangement
consideration should be allocated among the separate units of accounting. If the deliverables in a
revenue arrangement constitute separate units of accounting according to the EITF Issue No. 00-21
separation criteria, the revenue-recognition policy must be determined for each identified unit. If
the arrangement is a single unit of accounting, the revenue-recognition policy must be determined
for the entire arrangement, and all non-refundable upfront license fees are deferred and recognized
as revenues on a straight-line basis over the expected term of the Companys continued involvement
in the collaboration.
7
The Company recognizes collaborative research revenue over the term of various collaboration
agreements, as negotiated monthly contracted amounts are earned or reimbursable costs are incurred
related to those agreements. Negotiated monthly contracted amounts are earned in relative
proportion to the performance required under the contracts. Non-refundable license fees are
recognized over the related performance period or at the time that the Company has satisfied all
performance obligations. Milestone payments are recognized as revenue upon the achievement of
specified milestones when (i) the Company has earned the milestone payment, (ii) the milestone is
substantive in nature and the achievement of the milestone is not reasonably assured at the
inception of the agreement, (iii) the fees are non-refundable, and (iv) performance obligations
after the milestone achievement will continue to be funded by the collaborator at a level
comparable to the level before the milestone achievement. Any amounts received prior to satisfying
the Companys revenue recognition criteria are recorded as deferred revenue on the consolidated
balance sheet.
Royalty revenue is recognized related to the sale or use of the Companys products or
technologies under license agreements with third parties. For those arrangements where royalties
are reasonably estimable, the Company recognizes revenue based on estimates of royalties earned
during the applicable period and adjusts for differences between the estimated and actual royalties
in the following period. Historically, these adjustments have not been material. For those
arrangements where royalties are not reasonably estimable, the Company recognizes revenue upon
receipt of royalty statements from the applicable licensee. Non-refundable license fees are
recognized over the related performance period or at the time the Company has satisfied all
performance obligations.
Adoption of recent accounting pronouncements
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. The adoption did not
have a material impact on the Companys financial statements.
SFAS No. 141(R)
In December 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
141(R), Business Combinations. SFAS No. 141(R) changes the requirements for an acquirers
recognition and measurement of the assets acquired and liabilities assumed in a business
combination, including the treatment of contingent consideration, pre-acquisition contingencies,
transaction costs, in-process research and development and restructuring costs. In addition, under
SFAS No. 141(R), changes in an acquired entitys deferred tax assets and uncertain tax positions
after the measurement period will impact income tax expense. This statement is effective with
respect to business combination transactions occurring after December 31, 2008. The Company is
currently evaluating the impact of this statement on future operations, changes in estimates and
unrecognized tax benefits and liabilities as a result of recent business combination transactions.
8
SFAS No. 160
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated
Financial Statements (an amendment of Accounting Research Bulletin No. 51). SFAS No. 160 requires
that non-controlling (minority) interests be reported as a component of equity, that net income
attributable to the parent and to the non-controlling interest be separately identified in the
income statement, that changes in a parents
ownership interest while the parent retains its controlling interest be accounted for as
equity transactions, and that any retained non-controlling equity investment upon the
deconsolidation of a subsidiary be initially measured at fair value. This statement is effective
for fiscal years beginning after December 31, 2008, and shall be applied prospectively. However,
the presentation and disclosure requirements of SFAS No. 160 are required to be applied
retrospectively for all periods presented. The retrospective presentation and disclosure
requirements of this statement will be applied to any prior periods presented in financial
statements for the fiscal year ending December 31, 2009, and later periods during which the Company
has a consolidated subsidiary with a non-controlling interest. As of March 31, 2009, the Company
does not have any consolidated subsidiaries in which there is a non-controlling interest, and
therefore adoption of this statement did not have a material impact on the Companys consolidated
financial statements.
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
entitys financial position, financial performance, and cash flows. The Company adopted this
guidance effective January 1, 2009. As this statement relates specifically to disclosures, there
was no impact on the Companys consolidated financial statements as a result of adoption.
Note 2 Stock-based compensation
The following table summarizes the stock-based compensation expense that the Company recorded
in its consolidated statements of income in accordance with SFAS No. 123(R), Share-Based Payment,
for the three month periods ended March 31, 2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
Cost of product sales |
|
$ |
798 |
|
|
$ |
595 |
|
Research and development |
|
|
1,702 |
|
|
|
1,435 |
|
Marketing and sales |
|
|
759 |
|
|
|
695 |
|
General and administrative |
|
|
2,499 |
|
|
|
2,467 |
|
|
|
|
|
|
|
|
Total |
|
$ |
5,758 |
|
|
$ |
5,192 |
|
|
|
|
|
|
|
|
The Company used the following weighted average assumptions (annualized percentages) to
estimate the fair value of options granted and the shares purchasable under the Companys stock
option plans and Employee Stock Purchase Plan (ESPP) for the three month periods ended March 31,
2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option Plans |
|
|
ESPP |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Risk-free interest rate |
|
|
1.6 |
% |
|
|
2.8 |
% |
|
|
1.3 |
% |
|
|
3.3 |
% |
Volatility |
|
|
37 |
% |
|
|
35 |
% |
|
|
47 |
% |
|
|
34 |
% |
Dividend yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term (years) |
|
|
4.2 |
|
|
|
4.2 |
|
|
|
0.5 |
|
|
|
0.5 |
|
Resulting average fair value |
|
$ |
12.96 |
|
|
$ |
17.55 |
|
|
$ |
12.20 |
|
|
$ |
14.82 |
|
9
The Companys unrecognized stock-based compensation expense, before income taxes and adjusted
for estimated forfeitures, related to outstanding unvested share-based payment awards was
approximately as follows (in thousands, except number of years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Unrecognized |
|
|
|
Remaining Expense |
|
|
Expense as of |
|
Awards |
|
Life (Years) |
|
|
March 31, 2009 |
|
Options |
|
|
1.3 |
|
|
$ |
34,194 |
|
ESPP |
|
|
0.2 |
|
|
|
287 |
|
Restricted Stock |
|
|
1.8 |
|
|
|
11,503 |
|
Deferred Issuance Restricted Stock |
|
|
1.4 |
|
|
|
2,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
48,070 |
|
|
|
|
|
|
|
|
|
Note 3 Net income per share
The Company computes net income per share in accordance with SFAS No. 128, Earnings Per
Share, and SFAS No. 123(R). Basic net income per share is computed by dividing the net income for
the period by the weighted average number of common shares outstanding during the period. Diluted
net income per share is computed by dividing the net income for the period by the weighted average
number of common and common equivalent shares outstanding during the period. The Company excludes
stock options 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 Companys common stock
because their effect is anti-dilutive.
The following table sets forth the computation of net income per share (in thousands, except
per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
Net income |
|
$ |
25,747 |
|
|
$ |
31,945 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding Basic |
|
|
52,407 |
|
|
|
53,796 |
|
Effect of dilutive common stock options outstanding |
|
|
719 |
|
|
|
1,227 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding Diluted |
|
|
53,126 |
|
|
|
55,023 |
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.49 |
|
|
$ |
0.59 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.48 |
|
|
$ |
0.58 |
|
|
|
|
|
|
|
|
Dilutive securities include stock options and restricted stock subject to vesting. Potentially
dilutive securities totaling approximately 3,595,000 and 1,934,000 shares for the three month periods
ended March 31, 2009 and 2008, respectively, were excluded from the calculation of diluted earnings
per share because of their anti-dilutive effect.
Note 4 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 Companys market
assumptions. These two types of inputs create the following fair value hierarchy:
10
|
|
|
Level 1 Quoted prices for identical instruments in active markets. |
|
|
|
|
Level 2 Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and model-derived
valuations in which all significant inputs and significant value drivers are observable in
active markets. |
|
|
|
|
Level 3 Valuations derived from valuation techniques in which one or more significant
inputs or significant value drivers are unobservable. |
This hierarchy requires the Company to use observable market data, when available, and to
minimize the use of unobservable inputs when determining fair value. A financial instruments
categorization within the valuation hierarchy is based upon the lowest level of input that is
significant to the fair value measurement.
Following is a description of the Companys valuation methodologies used for instruments
measured at fair value, as well as the general classification of such instruments pursuant to the
valuation hierarchy. Where appropriate, the description includes details of the valuation models,
the key inputs to those models, as well as any significant assumptions.
Assets and liabilities measured at fair value on a recurring basis:
The Companys available-for-sale securities are comprised of tax advantaged municipal
securities and money market funds. When available, the Company generally uses quoted market prices
to determine fair value, and classifies such items as Level 1. If quoted market prices are not
available, prices are determined using prices for recently traded financial instruments with
similar underlying terms as well as directly or indirectly observable inputs, such as interest
rates and yield curves that are observable at commonly quoted intervals. The Company classifies
such items as Level 2.
The following table presents the Companys fair value hierarchy for assets and liabilities
measured at fair value on a recurring basis (as described above) as of March 31, 2009 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 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 |
|
$ |
6,381 |
|
|
$ |
229,174 |
|
|
$ |
|
|
|
$ |
235,555 |
|
Marketable securities |
|
|
|
|
|
|
399,072 |
|
|
|
|
|
|
|
399,072 |
|
Derivatives |
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
9 |
|
Other investments (1) |
|
|
|
|
|
|
4,108 |
|
|
|
|
|
|
|
4,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value |
|
|
6,381 |
|
|
|
632,363 |
|
|
|
|
|
|
|
638,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
$ |
|
|
|
$ |
272 |
|
|
$ |
|
|
|
$ |
272 |
|
Other investments (1) |
|
|
|
|
|
|
4,266 |
|
|
|
|
|
|
|
4,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value |
|
$ |
|
|
|
$ |
4,538 |
|
|
$ |
|
|
|
$ |
4,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes the Companys deferred compensation plan liability and related assets
which are invested in corporate owned life insurance policies. |
Assets and liabilities measured at fair value on a non-recurring basis:
Certain assets and liabilities are measured at fair value on a non-recurring basis and
therefore are not included in the table above. Items valued using such internally generated
valuation techniques are classified according to the lowest level input or value driver that is
significant to the valuation. Thus, an item may be classified as Level 3 even though there may be
some significant inputs that are readily observable. Such instruments are not measured at fair
value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for
example, when there is evidence of impairment).
11
Equity investment in private company
In 2006, the Company invested in Qualigen, Inc. (Qualigen), a private company. The valuation
of investments in non-public companies requires significant management judgment due to the absence
of quoted market prices, inherent lack of liquidity and the long-term nature of such assets. The
Companys equity investments in private companies are valued initially based upon the transaction
price under the cost method of accounting. Equity investments in non-public companies are
classified as Level 3 in the fair value hierarchy. The Companys investment in Qualigen, which
totaled approximately $5.4 million as of March 31, 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 investees latest financing round, the performance of the investee in relation to its own
operating targets and its business plan, the investees revenue and cost trends, the investees
liquidity and cash position, including its cash burn rate, and market acceptance of the investees
products and services. From time to time, the Company may consider third party evaluations or
valuation reports. The Company also considers new products and/or services that the investee may
have forthcoming, any significant news specific to the investee, the investees competitors and/or
industry and the outlook of the overall industry in which the investee operates. In the event the
Companys judgments change as to other-than temporary declines in value, the Company may record an
impairment loss, which could have an adverse impact on its results of operations. During the third
quarter of 2008, the Company 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 5 Balance sheet information
The following tables provide details of selected balance sheet items (in thousands):
Inventories
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Raw materials and supplies |
|
$ |
7,830 |
|
|
$ |
8,529 |
|
Work in process |
|
|
21,336 |
|
|
|
24,945 |
|
Finished goods |
|
|
23,009 |
|
|
|
20,932 |
|
|
|
|
|
|
|
|
|
|
$ |
52,175 |
|
|
$ |
54,406 |
|
|
|
|
|
|
|
|
12
Property, plant and equipment, net
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Land |
|
$ |
18,804 |
|
|
$ |
18,804 |
|
Building |
|
|
80,379 |
|
|
|
80,426 |
|
Machinery and equipment |
|
|
158,298 |
|
|
|
153,211 |
|
Building improvements |
|
|
34,836 |
|
|
|
34,592 |
|
Furniture and fixtures |
|
|
16,566 |
|
|
|
16,270 |
|
Construction in-progress |
|
|
171 |
|
|
|
19 |
|
|
|
|
|
|
|
|
Property, plant and equipment, at cost |
|
|
309,054 |
|
|
|
303,322 |
|
Less accumulated depreciation and amortization |
|
|
(166,255 |
) |
|
|
(161,400 |
) |
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
142,799 |
|
|
$ |
141,922 |
|
|
|
|
|
|
|
|
Licenses, manufacturing access fees and other assets, net
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Patents |
|
$ |
18,298 |
|
|
$ |
18,093 |
|
Purchased intangible assets |
|
|
33,636 |
|
|
|
33,636 |
|
Licenses and manufacturing access fees |
|
|
58,707 |
|
|
|
64,507 |
|
Investment in Qualigen, Inc. |
|
|
5,404 |
|
|
|
5,404 |
|
Other assets |
|
|
4,772 |
|
|
|
3,611 |
|
|
|
|
|
|
|
|
Licenses and manufacturing access fees and other assets, at cost |
|
|
120,817 |
|
|
|
125,251 |
|
Less accumulated amortization |
|
|
(64,334 |
) |
|
|
(68,643 |
) |
|
|
|
|
|
|
|
Licenses and manufacturing access fees and other assets, net |
|
$ |
56,483 |
|
|
$ |
56,608 |
|
|
|
|
|
|
|
|
Other accrued expenses
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Royalties |
|
$ |
1,109 |
|
|
$ |
985 |
|
Professional fees |
|
|
3,272 |
|
|
|
1,494 |
|
Warranty |
|
|
630 |
|
|
|
923 |
|
Other |
|
|
1,228 |
|
|
|
625 |
|
|
|
|
|
|
|
|
Other accrued expenses |
|
$ |
6,239 |
|
|
$ |
4,027 |
|
|
|
|
|
|
|
|
Note 6 Marketable securities
The Companys available-for-sale securities include tax advantaged municipal securities with a
minimum Moodys credit rating of A3 and a minimum Standard & Poors credit rating of A-. As of
March 31, 2009, the Company did not hold auction rate securities. The Companys investment policy
limits the effective maturity on individual securities to six years and an average portfolio
maturity to three years. At March 31, 2009, the Companys portfolios had an average term of three
years and an average credit quality of AA2 as defined by Moodys.
13
The following is a summary of marketable securities as of March 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
Municipal securities |
|
$ |
390,357 |
|
|
$ |
9,158 |
|
|
$ |
(443 |
) |
|
$ |
399,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the estimated fair values and gross unrealized losses for the
Companys investments in individual securities that have been in a continuous unrealized loss
position deemed to be temporary for less than 12 months and for more than 12 months as of March 31,
2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
|
More than 12 Months |
|
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
Municipal securities |
|
$ |
15,306 |
|
|
$ |
(71 |
) |
|
$ |
19,376 |
|
|
$ |
(372 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized losses on certain of the Companys 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 March 31, 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, those investments with a
contractual maturity of greater than 12 months and that are in an unrealized loss position deemed
to be temporary at March 31, 2009 have been classified as non-current marketable securities.
The following table shows the current and non-current classification of the Companys
marketable securities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Current |
|
$ |
366,395 |
|
|
$ |
371,276 |
|
Non-current |
|
|
32,677 |
|
|
|
73,780 |
|
|
|
|
|
|
|
|
Total municipal securities |
|
$ |
399,072 |
|
|
$ |
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. Gross realized gains from the sale of marketable
securities were $1.8 million and $0.3 million for the three month periods ended March 31, 2009 and
2008, respectively. Gross realized losses from the sale of marketable securities were $0.4 million
and $0 for the three month periods ended March 31, 2009 and 2008, respectively.
Note 7 Short-term borrowings
In February 2009, the Company entered into a credit agreement with Bank of America, N.A.
(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
Companys acquisition of Tepnel Life Sciences plc (Tepnel) and for other general corporate
purposes. At the Companys 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 Americas prime rate and (iii) 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.
14
In March 2009, the Company and Bank of America amended the credit agreement to increase the
amount which the Company may borrow under the credit agreement from $180.0 million to $250.0
million. As of March 31, 2009, there was $170.0 million in borrowings outstanding under the
revolving credit facility. These amounts were borrowed in anticipation of funding the aquisition of Tepnel, which closed
on April 8, 2009.
On April 3, 2009, the Company borrowed an additional $70.0 million under its revolving credit
facility with Bank of America, bringing the total principal amount outstanding under the credit
facility to $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.
Note 8 Income tax
The Company currently estimates that its annual effective tax rate for 2009 will be
approximately 32% to 36%, compared to the prior year effective tax rate of approximately 34%. The
Companys tax rate may vary from this estimated range as the Company evaluates the impact the
acquisition of Tepnel will have on its effective tax rate.
As of March 31, 2009, the Company had total gross unrecognized tax benefits of $6.2 million.
The amount of unrecognized tax benefits (net of the federal benefit for state taxes) that would
favorably affect the Companys effective income tax rate, if recognized, was $4.7 million. Material
filings subject to future examination are the Companys California returns filed for the 2005
through 2007 tax years, and the U.S. federal returns filed for the 2006 and 2007 tax years.
15
Note 9 Stockholders equity
Changes in stockholders equity for the three months ended March 31, 2009 were as follows (in
thousands):
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
813,760 |
|
Net income |
|
|
25,747 |
|
Other comprehensive income, net |
|
|
2,364 |
|
Proceeds from the issuance of common stock |
|
|
534 |
|
Purchases of common stock by board members |
|
|
45 |
|
Repurchase and retirement of common stock |
|
|
(35,627 |
) |
Repurchase and retirement of restricted stock for payment of taxes |
|
|
(34 |
) |
Stock-based compensation |
|
|
5,715 |
|
Stock-based compensation income tax benefits |
|
|
127 |
|
|
|
|
|
Balance at March 31, 2009 |
|
$ |
812,631 |
|
|
|
|
|
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 Companys wholly owned subsidiaries financial statements
and unrealized gains and losses on their available-for-sale securities, are reported, net of their
related tax effect, to arrive at comprehensive income.
Components of comprehensive income, net of income tax, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
Net income |
|
$ |
25,747 |
|
|
$ |
31,945 |
|
|
|
|
|
|
|
|
Change in net unrealized gain on available-for-sale-securities |
|
|
2,424 |
|
|
|
1,278 |
|
Foreign currency translation adjustment |
|
|
(60 |
) |
|
|
92 |
|
|
|
|
|
|
|
|
Other comprehensive income, net |
|
|
2,364 |
|
|
|
1,370 |
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
28,111 |
|
|
$ |
33,315 |
|
|
|
|
|
|
|
|
Stock options
A summary of the Companys stock option activity for all option plans is as follows (in
thousands, except price per share data and number of years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Weighted Average |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Life (Years) |
|
|
Value |
|
Outstanding at December 31, 2008 |
|
|
5,657 |
|
|
$ |
44.12 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
97 |
|
|
|
40.35 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(22 |
) |
|
|
23.96 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
(22 |
) |
|
|
56.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2009 |
|
|
5,710 |
|
|
$ |
44.09 |
|
|
|
5.2 |
|
|
$ |
39,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2009 |
|
|
3,727 |
|
|
$ |
37.88 |
|
|
|
4.8 |
|
|
$ |
38,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Restricted Stock
A summary of the Companys restricted stock award activity is as follows (in thousands, except
price per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Number |
|
|
Grant-Date |
|
|
|
of Shares |
|
|
Fair Value |
|
Unvested at December 31, 2008 |
|
|
294 |
|
|
$ |
57.51 |
|
Granted |
|
|
1 |
|
|
|
43.23 |
|
Vested and exercised |
|
|
(7 |
) |
|
|
49.32 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at March 31, 2009 |
|
|
288 |
|
|
$ |
57.67 |
|
|
|
|
|
|
|
|
Stock Repurchase Program
In August 2008, the Companys Board of Directors authorized the repurchase of up to $250.0
million of the Companys common stock over the two years following adoption of the program, through
negotiated or open market transactions. There is no minimum or maximum number of shares to be
repurchased under the program. During the first quarter of 2009, the Company repurchased and
retired approximately 874,800 shares under this program at an average price of $40.73, or $35.6
million in total. The Company has repurchased and retired approximately 2,580,000 shares under this
program since its inception at an average price of $42.86, or approximately $110.6 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 10 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 Companys petition to join the
arbitration. Digenes 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.
Digenes 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 Companys 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.
17
Note 11 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). During the three months
ended March 31, 2009, realized gains and losses on these foreign currency forward contracts were
not material.
The Company also adopted SFAS No. 161 effective January 1, 2009. SFAS No. 161 requires
enhanced disclosures about how derivative and hedging activities affect the Companys financial
position, financial performance and cash flows.
The following is a summary of the Companys assets and liabilities related to foreign currency
forward contracts as of March 31, 2009 (in thousands):
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments under SFAS No. 133: |
|
Balance sheet location |
|
March 31,
2009 |
|
Foreign currency forward contracts |
|
Other current assets |
|
$ |
9 |
|
|
|
Other accrued expenses |
|
|
(272 |
) |
|
|
|
|
|
|
|
|
|
|
$ |
(263 |
) |
|
|
|
|
|
|
Note 12 Subsequent events
Acquisition of Tepnel Life Sciences plc
On April 8, 2009, the Company completed its acquisition of Tepnel Life Sciences plc, a company
registered in England and Wales. The acquisition was consummated pursuant to a court-sanctioned
scheme of arrangement under Part 26 of the UK Companies Act 2006 (the Scheme). Pursuant to the
Scheme, on the closing date 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 in cash 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 Company is obligated to pay the purchase price in
British pounds.
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. In accordance with
SFAS No. 141(R), approximately $1.6 million of costs associated with the Companys acquisition of
Tepnel have been included in general and administrative expenses for the first quarter of 2009.
Amended Collaboration Agreement with DiagnoCure Inc.
On April 29, 2009, the
Company and DiagnoCure, Inc. ("DiagnoCure") entered into an amendment (the "Amendment") to the License, Development
and Cooperation Agreement originally signed by the parties on November 19, 2003 (the "Agreement"). Under the Agreement,
the Company acquired exclusive worldwide diagnostic rights to the PCA3 gene (the "PCA3 Patent Rights"). Pursuant
to the Amendment, the Company's exclusive license in the United States to the PCA3 Patent Rights under the Agreement
will be converted into a co-exclusive license (with DiagnoCure) in the United States under certain conditions, including
the Company's failure to timely file an application with the FDA for regulatory approval of a PCA3 assay in the United
States.
Pursuant to the Amendment, the Company has agreed to use its commercially reasonable efforts to obtain 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, the Company has agreed to make annual payments of $0.5 million to DiagnoCure until specific milestones are met.
Half of the annual payments may be applied by the Company against future royalties due and payable to DiagnoCure under the Agreement.
The Company has also agreed to pay $5.0 million to purchase 4.9 million shares of newly issued DiagnoCure preferred stock, which shall be convertible, in whole or in part at the Company's election, into DiagnoCure common stock on a one-to-one basis. The preferred stock will have a liquidation preference upon the occurrence of certain events, which will be secured by certain intellectual
property collateral. DiagnoCure will have the right to convert the preferred stock into common stock under certain circumstances and may redeem the preferred stock at any time prior to conversion at a specified price.
18
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This report contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, which provides a safe harbor for these types of statements. To the
extent statements in this report involve, without limitation, our expectations for growth,
estimates of future revenue, expenses, profit, cash flow, balance sheet items or any other guidance
on future periods, these statements are forward-looking statements. Forward-looking statements can
be identified by the use of forward-looking words such as believes, expects, hopes, may,
will, plans, intends, estimates, could, should, would, continue, seeks or
anticipates, or other similar words, including their use in the negative. Forward-looking
statements are not guarantees of performance. They involve known and unknown risks, uncertainties
and assumptions that may cause actual results, levels of activity, performance or achievements to
differ materially from any results, level of activity, performance or achievements expressed or
implied by any forward-looking statement. We assume no obligation to update any forward-looking
statements.
The following information should be read in conjunction with our March 31, 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 Managements 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 since 2002 in both revenues and earnings, primarily due to the
success of our clinical diagnostic products for sexually transmitted diseases, or STDs, and blood
screening products that are used to detect the presence of human immunodeficiency virus (type 1),
or HIV-1, hepatitis C virus, or HCV, hepatitis B virus, or HBV, and West Nile Virus, or WNV. Under
our collaboration agreement with Novartis Vaccines and Diagnostics, Inc., or Novartis, formerly
known as Chiron Corporation, or Chiron, we manufacture blood screening products, while Novartis is
responsible for marketing, sales and service of those products, which Novartis sells under its
trademarks.
19
Recent Events
Financial Results
Product sales for the first quarter of 2009 were $112.5 million, compared to $101.5 million in
the same period of the prior year, an increase of 11%. Total revenues for the first quarter of 2009
were $116.2 million, compared to $122.6 million in the same period of the prior year, a decrease of
5%. Net income for the first quarter of 2009 was $25.7 million ($0.48 per diluted share), compared
to $31.9 million ($0.58 per diluted share) in the same period of the prior year, a decrease of 19%.
Total revenues and net income declined in the first quarter of 2009 due to non-recurring royalty
and license revenue recorded in the prior year period. Specifically, we received $16.4 million of
revenue from Bayer Corporation, or Bayer, in the first quarter of 2008 representing the third and final payment due to us
in connection with the settlement of the companies patent infringement litigation.
Acquisition of Tepnel Life Sciences plc
In April 2009, we completed the acquisition of Tepnel Life Sciences plc, or Tepnel, a company
registered in England and Wales, for approximately $137.1 million (based on the then applicable
exchange rate). 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 the European molecular diagnostics market.
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. As of March 31, 2009, we have repurchased and retired approximately 2,580,000 shares
under this program at an average price of $42.86, or approximately $110.6 million in total.
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 costs of goods sold incurred in connection with the collaboration.
In addition, we will receive a percentage of the blood screening assay revenue generated under the
collaboration, as described 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.
20
Credit Agreement
In February 2009, we entered into a credit agreement with Bank of America, N.A., or 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. In March 2009, we borrowed $170.0 million under the
revolving credit facility and used approximately $137.1 million to fund our acquisition of Tepnel
in April 2009. 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 Americas prime rate and (iii) 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 and Bank of America amended the credit agreement to increase the amount
which 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 bringing the total principal amount outstanding under the credit facility to $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 the Wells line of credit as of the
termination date.
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 privately held companies,
income tax, liabilities associated with employee benefit costs, inventories, goodwill and
long-lived assets, including patent costs, capitalized software 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 first quarter of 2009 to the
items that we disclosed as our critical accounting policies and estimates in Managements
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 for our marketable security investment portfolio are liquidity and
safety of principal. Investments are made with the objective 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 and whenever events or changes in 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 March 31, 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, those investments with a contractual
maturity of greater than 12 months and that are in an unrealized loss position deemed to be temporary
at March 31, 2009 have been classified as non-current marketable securities.
21
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 did not have a material impact on our financial statements, as all agreements
were in compliance with this standard prior to adoption.
SFAS No. 141(R)
Effective January 1, 2009, we adopted Statement of Financial Accounting Standards, or SFAS,
No. 141(R), Business Combinations. SFAS No. 141(R) changes the requirements for an acquirers
recognition and measurement of the assets acquired and liabilities assumed in a business
combination, including the treatment of contingent consideration, pre-acquisition contingencies,
transaction costs, in-process research and development and restructuring costs. In addition, under
SFAS No. 141(R), changes in an acquired entitys deferred tax assets and uncertain tax positions
after the measurement period will impact income tax expense. We are currently evaluating the impact
of this statement on future operations, changes in estimates and unrecognized tax benefits and
liabilities as a result of recent business combination transactions.
SFAS No. 160
Effective January 1, 2009, we adopted SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements (an amendment of Accounting Research Bulletin No. 51). SFAS No. 160
requires that noncontrolling (minority) interests be reported as a component of equity, that net
income attributable to the parent and to the non-controlling interest be separately identified in
the income statement, that changes in a parents ownership interest while the parent retains its
controlling interest be accounted for as equity transactions, and that any retained noncontrolling
equity investment upon the deconsolidation of a subsidiary be initially measured at fair value. As
of March 31, 2009, we do not have any consolidated subsidiaries in which there is a noncontrolling
interest, and therefore adoption of this statement did not have an impact on our consolidated
financial statements.
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
entitys financial position, financial performance, and cash flows. As this statement relates
specifically to disclosures, there was no impact on our consolidated financial statements as a
result of adoption.
22
Results of Operations
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions) |
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
Product Sales |
|
$ |
112.5 |
|
|
$ |
101.5 |
|
|
$ |
11.0 |
|
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenues |
|
|
97 |
% |
|
|
83 |
% |
|
|
|
|
|
|
|
|
|
|
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|
Our primary source of revenue comes from product sales, which consist primarily of the sale of
clinical diagnostic and blood screening products in the United States. Our clinical diagnostic
products include our APTIMA, PACE, AccuProbe and Amplified Mycobacterium Tuberculosis Direct Test
product lines. The principal customers for our clinical diagnostics products include reference
laboratories, public health institutions and hospitals. The blood screening assays and instruments
we manufacture are marketed worldwide through our collaboration with Novartis under the Procleix
and Ultrio trademarks.
We recognize product sales from the manufacture and shipment of tests for screening donated
blood at the contractual transfer prices specified in our collaboration agreement with Novartis for
sales to end-user blood bank facilities located in countries where our products have obtained
governmental approvals. Blood screening product 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 11% in the first quarter of 2009, compared to the same period of the
prior year. The $11.0 million increase was primarily attributed to:
|
|
|
an increase of $7.4 million due to higher APTIMA assay sales, and |
|
|
|
|
an increase of $7.1 million due to higher blood screening assay sales, partially
offset by |
|
|
|
|
a decrease of $2.8 million in instrumentation sales, and |
|
|
|
|
a decrease of $1.5 million in PACE product sales. |
Diagnostic product sales, including assay, instrument, and ancillary sales, represented $59.6
million, or 53% of product sales, in the first quarter of 2009, compared to $52.5 million, or 52%
of product sales, in the first quarter of 2008, an increase of 14%. This $7.1 million increase was
primarily driven by volume gains in our APTIMA product line as the result of PACE conversions;
market share gains we attribute to the superior clinical performance of our assays; and the
availability of our fully automated TIGRIS instrument. Overall APTIMA growth was partially offset
by a $1.5 million decrease in our PACE product sales as customers continue to convert to the more
sensitive amplified APTIMA product line. In general, the price of our amplified APTIMA test is
twice that of our non-amplified PACE product, thus the conversion from PACE to APTIMA drives an
overall increase in product sales even if underlying testing volumes remain the same. Diagnostic
product sales were negatively impacted by $1.4 million in unfavorable foreign exchange rate impacts
due to a stronger United States dollar in the first quarter of 2009.
Blood screening related sales, including assay, instrument, and ancillary sales, represented
$52.9 million, or 47% of product sales, in the first quarter of 2009, compared to $49.0 million, or
48% of product sales, in the first quarter of 2008, an increase of 8%. This $3.9 million increase
was principally attributed to a one-time favorable impact of approximately $8.2 million based upon
the amended terms of our collaboration agreement with Novartis, which allowed us to recognize an
additional month of our share of net blood screening donation revenues. Growth in blood screening
was negatively impacted by $2.9 million in unfavorable foreign exchange rate impacts due to a
stronger United States dollar, a decrease of $2.8 million in instrumentation sales, and a decrease
of $0.4 million in sales of instrument ancillaries. Our share of blood screening revenues is based upon
sales of assays by Novartis, on blood donation levels and the related price per donation.
23
|
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|
|
|
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|
|
(Dollars in millions) |
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
Collaborative Research Revenue |
|
$ |
1.7 |
|
|
$ |
2.5 |
|
|
$ |
(0.8 |
) |
|
|
(32 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenues |
|
|
1 |
% |
|
|
2 |
% |
|
|
|
|
|
|
|
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|
|
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 32% in the first quarter of 2009, compared to the
same period of the prior year. The $0.8 million decrease was primarily due to:
|
|
|
a decrease of $0.8 million in reimbursement from 3M Corporation, or 3M, related to
our healthcare-associated infection collaboration which was discontinued in June 2008, and |
|
|
|
|
a net decrease of $0.2 million in reimbursement from Novartis for shared development
expenses, comprised of $1.1 million in lower billings related to the development of the
Procleix Ultrio assay, partially offset by the recognition of $0.5 million in
previously deferred revenue for Novartis projects and $0.3 million in increased
billings related to new projects for Dengue, the Panther instrument and software
development, partially offset by |
|
|
|
|
an increase of $0.3 million of funded development for products associated with our
collaboration with Millipore. |
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. These relationships may not be established or maintained
and current collaborative research revenue may decline.
|
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|
|
|
|
(Dollars in millions) |
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
Royalty and License Revenue |
|
$ |
2.0 |
|
|
$ |
18.6 |
|
|
$ |
(16.6 |
) |
|
|
(89 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenues |
|
|
2 |
% |
|
|
15 |
% |
|
|
|
|
|
|
|
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|
|
|
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|
|
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 decreased 89% in the first quarter 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, and thus these payments
will not recur in future periods.
24
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.
We may not be able to do so and future royalty and license revenue may decline.
|
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|
|
|
|
|
|
(Dollars in millions) |
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
Cost of Product Sales |
|
$ |
33.3 |
|
|
$ |
32.6 |
|
|
$ |
0.7 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit margin as a percent of product sales |
|
|
70 |
% |
|
|
68 |
% |
|
|
|
|
|
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|
|
Cost of product sales includes direct material, direct labor, and manufacturing overhead
associated with the production of inventories. Other components of cost of product sales include
royalties, warranty costs, instrument and software amortization and allowances for scrap.
In addition, we manufacture significant quantities of materials, development lots, and
clinical trial lots of product prior to receiving approval from the
United States Food and Drug Administration,
or 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 2% in the first quarter of 2009, compared to the same period of the
prior year. The $0.7 million increase was primarily due to the following:
|
|
|
an increase of $1.8 million attributed to unfavorable manufacturing variances,
primarily related to changes in production volumes, |
|
|
|
|
an increase of
$1.0 million related to increased APTIMA sales volume, and |
|
|
|
|
an increase of $0.8 million related to net increases in inventory valuation
allowances, partially offset by |
|
|
|
|
a decrease of $2.8 million attributed to lower instrument sales and instrument
related costs. |
Our gross profit margin as a percentage of product sales increased to 70% in the first quarter
of 2009 from 68% during the same period of 2008. The increase in gross profit margin percentage was
principally attributed to the following:
|
|
|
an increase in revenue received from Novartis as a result of the amended
collaboration agreement, and |
|
|
|
|
an increase in APTIMA sales, partially offset by |
|
|
|
|
an increase in cost of sales from unfavorable changes in production volumes, and |
|
|
|
|
a decrease in instrument sales and instrument-related costs, which have lower
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 are also affected by manufacturing efficiencies, allowances
for scrap or expired materials, additional costs related to initial production quantities of new
products after achieving FDA approval, and contractual adjustments, such as instrumentation costs,
instrument service costs and royalties.
A portion of our blood screening revenues is attributable to sales of TIGRIS instruments to
Novartis, which totaled $1.0 million and $4.1 million during the first quarter 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.
25
We believe certain blood screening markets are trending from pooled testing of large numbers
of donor samples to smaller pool sizes. A greater number of tests will be required in markets where
smaller pool sizes are required. The greater number of tests required for smaller pool sizes will
increase our variable manufacturing costs, including costs of raw materials and labor. In 2008, we
were responsible for 100% of the cost of goods sold pursuant to our collaboration agreement with
Novartis. Effective January 1, 2009, our amended collaboration agreement with Novartis provides
that we will recover 50% of certain manufacturing costs incurred in connection with the
collaboration. If the price per donor or total sales volume does not increase in line with the
increase in our total variable manufacturing costs, our gross profit margin percentage from sales
of blood screening assays will decrease upon adoption of smaller pool sizes. We have already
observed this trend with respect to certain sales internationally. We are not able to predict
accurately the ultimate extent to which our gross profit margin percentage will be negatively
affected as a result of smaller pool sizes, because we do not know the ultimate selling price that
Novartis will charge to the end user or the degree to which smaller pool size testing will be
adopted across the markets in which we sell our products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions) |
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
Research and Development |
|
$ |
25.0 |
|
|
$ |
23.1 |
|
|
$ |
1.9 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenues |
|
|
22 |
% |
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 industrial applications, 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 increased 8% in the first quarter of 2009, compared to the same period of the
prior year. The $1.9 million increase was primarily due to the following:
|
|
|
an increase of $2.8 million for clinical evaluations and outside services associated
with our HPV clinical trials, partially offset by |
|
|
|
|
a decrease of
$0.6 million in development lot activity, primarily related to
the timing
of our HPV diagnostic product development activities, and |
|
|
|
|
a decrease of $0.6 million in depreciation and amortization in R&D. Beginning in
June 2008, the remaining unamortized balance related to our manufacturing access fees
paid to Roche is being amortized to cost of product sales. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions) |
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
Marketing and Sales |
|
$ |
11.1 |
|
|
$ |
11.9 |
|
|
$ |
(0.8 |
) |
|
|
(7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenues |
|
|
10 |
% |
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our marketing and sales expenses include salaries and other personnel-related expenses,
promotional expenses, and outside services.
26
Marketing and sales expenses decreased 7% in the first quarter of 2009, compared to the same
period of the prior year. The $0.8 million decrease was primarily due to higher spending in the
first quarter of 2008 for marketing studies and promotional activities related to our HPV and PCA3
products in the European Union.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions) |
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
General and Administrative |
|
$ |
13.8 |
|
|
$ |
11.9 |
|
|
$ |
1.9 |
|
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenues |
|
|
12 |
% |
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our general and administrative, or G&A, expenses include expenses for finance, legal,
strategic planning and business development, public relations and human resources.
General and administrative expenses increased 16% in the first quarter of 2009, compared to
the same period of the prior year. The $1.9 million increase was primarily due to the following:
|
|
|
an increase of $1.6 million in expenses related to the acquisition of Tepnel, |
|
|
|
|
an increase of $0.2 million for relocation and recruitment fees, |
|
|
|
|
an increase of
$0.3 million in salaries and wages expense, and |
|
|
|
|
an increase of $0.1 million in bad debt expense, partially offset by |
|
|
|
|
a decrease of $0.4 million in non-Tepnel related business development costs in the
prior year period. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions) |
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
Interest income |
|
$ |
4.9 |
|
|
$ |
4.2 |
|
|
$ |
0.7 |
|
|
|
17 |
% |
Interest expense |
|
|
(0.2 |
) |
|
|
|
|
|
|
(0.2 |
) |
|
|
N/M |
|
Other income / (expense) |
|
|
(0.1 |
) |
|
|
1.5 |
|
|
|
(1.6 |
) |
|
|
(107 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
$ |
4.6 |
|
|
$ |
5.7 |
|
|
$ |
(1.1 |
) |
|
|
(19 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The $0.7 million increase in interest income during the first quarter of 2009, compared to the
same period of the prior year, primarily resulted from realized gains on the sale of marketable
securities. The $0.2 million increase in interest expense is associated with borrowings under our
credit facility with Bank of America. The $1.6 million net decrease in other income and expense was
primarily due to a $1.6 million gain in the first quarter of 2008 resulting from the sale of our
equity interest in Molecular Profiling Institute, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions) |
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
Income Tax Expense |
|
$ |
11.8 |
|
|
$ |
16.8 |
|
|
$ |
(5.0 |
) |
|
|
(30 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of income before tax |
|
|
31 |
% |
|
|
34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense decreased by 30% in the first quarter of 2009, compared to the same period
of the prior year. The $5.0 million decrease in our income tax expense was largely due to the
following:
|
|
|
a decrease of $11.1 million in earnings before income taxes, |
|
|
|
|
the expiration of a federal
research tax credit in the first quarter of 2008, and |
|
|
|
|
the adjustment to our 2007 and 2008 manufacturers deduction in the first quarter of
2009 as a result of recently issued IRS guidance, partially offset by |
|
|
|
|
the overall increase of our research spending particularly in clinical evaluations
and outside services during the first quarter of 2009. |
We estimate that our annual effective tax rate for 2009 will be approximately 32% to 36%,
compared to the prior year effective tax rate of approximately 34%. Our tax rate may vary from this
estimated range as we evaluate the impact our acquisition of Tepnel will have on our effective tax
rate.
27
Liquidity and capital resources
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Cash, cash equivalents and current marketable securities |
|
$ |
652,590 |
|
|
$ |
431,398 |
|
Working capital |
|
|
546,121 |
|
|
|
506,457 |
|
Current ratio |
|
|
3:1 |
|
|
|
12:1 |
|
Our working capital at March 31, 2009 decreased $34.1 million from December 31, 2008 primarily
due to the current liability created by our credit facility with Bank of America, which was
partially offset by the subsequent drawdown on that facility as an increase to cash. Also
contributing to the decrease in working capital, was the classification of available-for-sale
securities with a contractual maturity greater than 12 months and in an unrealized loss position at
March 31, 2009 as non-current marketable securities.
The primary objectives of our investment policy are liquidity and safety of principal.
Consistent with these objectives, investments are made with the goal of achieving the highest rate
of return. The policy places emphasis on securities of high credit quality, with restrictions
placed on maturities and concentration by security type and issue.
Our available-for-sale securities include tax advantaged municipal securities with a minimum
Moodys credit rating of A3 and a minimum Standard & Poors credit rating of A-. As of March 31,
2009, we did not hold auction rate securities and have never held any
such securities. Our investment policy limits the
effective maturity on individual securities to six years and an average portfolio maturity to three
years. At March 31, 2009, our portfolios had an average term of three years and an average credit
quality of AA2 as defined by Moodys.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
|
(In thousands) |
|
|
|
|
|
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
52,018 |
|
|
$ |
67,520 |
|
|
$ |
(15,502 |
) |
Investing activities |
|
|
39,141 |
|
|
|
(100,308 |
) |
|
|
139,449 |
|
Financing activities |
|
|
135,000 |
|
|
|
3,131 |
|
|
|
131,869 |
|
Purchases of property, plant and equipment
(included in investing activities above) |
|
|
(7,525 |
) |
|
|
(20,033 |
) |
|
|
(12,508 |
) |
Our primary source of liquidity has been cash from operations, which includes the collection
of accounts and other receivables related to product sales, collaborative research agreements, and
royalty and license fees, as well as our recently established credit facility with Bank of America,
described above under Recent Events. Our primary short-term cash needs, which are subject to
change, include continued R&D spending to support new products, costs related to commercialization
of products and purchases of instrument systems, primarily TIGRIS, for placement with our
customers. In addition, we may use cash to continue the repurchase of our common stock under our
stock repurchase program, as well as for strategic purchases which may include the acquisition of
businesses and/or technologies complementary to our business. Certain R&D costs may be funded under
collaboration agreements with our collaboration partners.
Operating Activities
The $15.5 million decrease in net cash provided by operating activities during the first
quarter of 2009, compared to the same period in 2008, was primarily due to the following:
|
|
|
a decrease of $6.2 million in net income, primarily attributed to a $16.4 million
settlement payment received from Bayer in the first quarter of 2008, |
|
|
|
|
a decrease of
$5.0 million in income tax payable largely due to lower pre-tax
income, and |
|
|
|
|
a decrease of $4.0 million in inventories, and a $3.4 million decrease in accounts
payable primarily due to decreased inventory levels and timing of payments, partially
offset by |
|
|
|
|
an increase of $4.6 million in accounts receivable due to an increase in sales and
the timing of collections. |
28
Investing Activities
The $139.4 million increase in net cash provided by investing activities during the first
quarter of 2009, compared to the same period in 2008, was principally attributed to the following:
|
|
|
an increase of $131.1 million in the sale (net of purchases) of marketable
securities, and |
|
|
|
|
a decrease of $12.5 million in the purchase of property, plant, and equipment,
partially offset by |
|
|
|
|
a decrease of $4.1 million due to one-time proceeds received in the first quarter of
2008 for our equity interest in Molecular Profiling Institute, Inc. as a result of its
acquisition by Caris Diagnostics. |
Financing Activities
The $131.9 million increase in net cash provided by financing activities during the first
quarter of 2009, compared to the same period in 2008, was principally attributed to the following:
|
|
|
an increase of $170.0 million in borrowings under our credit facility, partially
offset by |
|
|
|
|
a decrease of $35.6 million for cash used to repurchase and retire 874,800 shares of
our common stock under our stock repurchase program, and |
|
|
|
|
a $2.5 million decrease in proceeds from the issuance of common stock. |
We receive cash from the exercise of employee stock options and proceeds from the sale of
common stock pursuant to our Employee Stock Purchase Plan. We expect fluctuations to occur
throughout the year, as the amount and frequency of stock-related transactions are dependent upon
the market performance of our common stock, along with other factors.
We believe that our available cash balances, anticipated cash flows from operations, proceeds
from stock option exercises and borrowings under our revolving credit facility will be sufficient
to satisfy our operating
needs for the foreseeable future. However, we operate in a rapidly evolving and often
unpredictable business environment that may change the timing or amount of expected future cash
receipts and expenditures. Accordingly, we may in the future be required to raise additional funds
through the sale of equity or debt securities or from additional credit facilities. Additional
capital, if needed, may not be available on satisfactory terms, if at all. Further, debt financing
may subject us to covenants restricting our operations.
We may from time to time consider the acquisition of businesses and/or technologies
complementary to our business. We could require additional equity or debt financing if we were to
engage in a material acquisition in the future.
Contractual obligations and commercial commitments
Our contractual obligations due as of March 31, 2009 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More Than |
|
|
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
Material purchase commitments(1) |
|
$ |
40,978 |
|
|
$ |
26,489 |
|
|
$ |
14,489 |
|
|
$ |
|
|
|
$ |
|
|
Collaborative commitments(2) |
|
|
4,763 |
|
|
|
1,307 |
|
|
|
1,899 |
|
|
|
250 |
|
|
|
1,307 |
|
Minimum royalty commitments(3) |
|
|
1,400 |
|
|
|
175 |
|
|
|
525 |
|
|
|
350 |
|
|
|
350 |
|
Deferred employee compensation(4) |
|
|
2,882 |
|
|
|
910 |
|
|
|
973 |
|
|
|
658 |
|
|
|
341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(5) |
|
$ |
50,023 |
|
|
$ |
28,881 |
|
|
$ |
17,886 |
|
|
$ |
1,258 |
|
|
$ |
1,998 |
|
|
|
|
(1) |
|
Amounts represent our minimum purchase commitments from key vendors for the TIGRIS
and Panther instruments, as well as raw materials used in manufacturing. Of the $41.0 million
total, $35.6 million is expected to be used to purchase TIGRIS instruments, of which we
anticipate that approximately $18.4 million of instruments will be sold to Novartis. Not
included in the $41.0 million is $9.6 million expected to be used to purchase validation,
pre-production and production instruments, and associated tooling, pursuant to our development
agreement with Stratec Biomedical Systems AG, or Stratec, for the Panther instrument, as well
as potential minimum purchase commitments under our supply agreement with Stratec. Our
obligations under the supply agreement are contingent on successful completion of all
activities under the development agreement with Stratec. |
29
|
|
|
(2) |
|
In addition to the minimum payments due under our collaborative agreements, we may
be required to pay up to $12.2 million in milestone payments, plus royalties on net sales of
any products using specified technology. We may also be required to pay up to $5.2 million in
future development costs in the form of milestone payments. |
|
(3) |
|
Amounts represent our minimum royalties due on the net sales of products
incorporating licensed technology and subject to a minimum annual royalty payment. During the
first quarter of 2009, we recorded $1.6 million in royalty costs related to our various
license agreements. |
|
(4) |
|
We have liabilities for deferred employee compensation which totaled $4.3 million at
March 31, 2009. These liabilities are typically dependent upon when certain key employees
retire or otherwise leave the Company. Of the total $4.3 million liability, $1.4 million was
not included in the table above as we cannot reasonably predict when these events may occur.
Total liabilities for deferred employee compensation are partially offset by deferred
compensation assets, which totaled $4.1 million at March 31, 2009. |
|
(5) |
|
Does not include amounts relating to our obligations under our collaboration with
Novartis, pursuant to which both parties have obligations to each other. We are obligated to
manufacture and supply blood screening assays to Novartis, and Novartis is obligated to
purchase all of the assay quantities specified on a 90-day demand forecast, due 90 days prior
to the date Novartis intends to take delivery, and certain quantities specified on a rolling
12-month forecast. |
Liabilities associated with uncertain tax positions, currently estimated at $6.2 million
(including interest), are not included in the table above as we cannot reasonably estimate when, if
ever, an amount would be paid to a government agency. Ultimate settlement of these liabilities is
dependent on factors outside of our control, such as examinations by each agency and expiration of
statutes of limitation for assessment of additional taxes.
We do not currently have and have never had any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance or special purpose
entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. In addition, we do not engage in trading activities
involving non-exchange traded contracts. As such, we are not materially exposed to any financing,
liquidity, market or credit risk that could arise if we had engaged in these relationships.
Available Information
Copies of our public filings are available on our Internet website at http://www.gen-probe.com
as soon as reasonably practicable after we electronically file such material with, or furnish them
to, the SEC.
30
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to interest earned on our
investment portfolio and the amount of interest payable on our one-year senior secured revolving
credit facility with Bank of America. As of March 31, 2009, there was $170.0 million in borrowings
outstanding under the revolving credit facility. 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 Americas prime rate and (iii) 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. We do not believe that we are exposed to significant interest rate risk with
respect to our credit facility based on our option to select the rate at which interest accrues under the
credit facility, the short-term nature of the borrowings and our ability to pay off the outstanding
balance in a timely manner if the applicable interest rate under the credit facility increases above the
current interest rate yields on our investment portfolio. A 100 basis point increase or decrease in
interest rates would increase or decrease our interest expense by approximately $1.7 million. Our risk
associated with fluctuating interest income is limited to our investments in interest rate sensitive
financial instruments. Under our current policies, we do not use interest rate derivative instruments to
manage this exposure to interest rate changes. We seek to ensure the safety and preservation of our
invested principal by limiting default risk, market risk, and reinvestment risk. We mitigate default risk
by investing in investment grade securities with an average portfolio
maturity of less than three years. A 100 basis point increase or decrease in
interest rates would increase or decrease our current investment balance by approximately $8.3
million. While changes in interest rates may affect the fair value of our investment portfolio, any
gains or losses are not recognized in our consolidated statements of income until the investment is sold
or if a reduction in fair value is determined to be an other-than-temporary impairment.
Foreign Currency Exchange Risk
Although the majority of our revenue is realized in United States dollars, some portions of
our revenue are realized in foreign currencies. As a result, our financial results could be
affected by factors such as changes in foreign currency exchange rates or weak economic conditions
in foreign markets. The functional currency of our wholly owned subsidiaries Gen-Probe UK Limited
and Molecular Light Technology Limited and its subsidiaries is the British pound. The functional
currency of Gen-Probe Italia S.r.l. and Gen-Probe Deutschland GmbH is the Euro. Accordingly, the
balance sheet accounts of these subsidiaries are translated into United States dollars using the
exchange rate in effect at the balance sheet date and revenue and expenses are translated using the
average exchange rates in effect during the period. The gains and losses from foreign currency
translation of the financial statements of these subsidiaries are recorded directly as a separate
component of stockholders equity under the caption Accumulated other comprehensive income.
Under our collaboration agreement with Novartis, a growing portion of blood screening product
sales is from western European countries. As a result, our international blood screening product
sales are affected by changes in the foreign currency exchange rates of those countries where
Novartis business is conducted in Euros or other local currencies. Based on international blood
screening product sales during the first quarter of 2009, a 10% movement of currency exchange rates
would result in a blood screening product sales increase or decrease of approximately $6.5 million
annually. Similarly, a 10% movement of currency exchange rates would result in a diagnostic product
sales increase or decrease of approximately $2.2 million annually. Our exposure for both blood
screening and diagnostic product sales is primarily in the United States dollar versus the Euro,
British pound, Australian dollar, and Canadian dollar.
Our total payables denominated in foreign currencies as of March 31, 2009 were not material.
Our receivables by currency as of March 31, 2009 reflected in U.S. dollar equivalents were as
follows (in thousands):
|
|
|
|
|
British pounds |
|
$ |
841 |
|
Canadian dollars |
|
|
855 |
|
Danish Krone |
|
|
364 |
|
Euro |
|
|
1,013 |
|
Swiss Franc |
|
|
16 |
|
U.S. dollars |
|
|
32,717 |
|
|
|
|
|
Total gross trade accounts receivable |
|
$ |
35,806 |
|
|
|
|
|
In order to reduce the effect of foreign currency fluctuations, we utilize foreign currency
forward exchange contracts, or forward contracts, to hedge certain foreign currency transaction
exposures. Specifically, we enter into forward contracts with a maturity of approximately 30 days
to hedge against the foreign exchange exposure created by certain balances that are denominated in
a currency other than the principal reporting currency of the entity recording the transaction. The
forward contracts do not qualify for hedge accounting and, accordingly, all of these instruments
are marked to market at each balance sheet date by a charge to earnings. The gains and losses on
the forward contracts are meant to mitigate the gains and losses on these outstanding foreign
currency transactions. We believe that these forward contracts do not subject us to undue risk due to
foreign exchange movements because gains and losses on these contracts are generally offset by
losses and gains on the underlying assets and liabilities. We do not use derivatives for trading or
speculative purposes. Although the impact of currency fluctuations on our financial results has
generally been immaterial in the past, there can be no guarantee the impact of currency
fluctuations related to our intercompany revenues and expenses and other activities will not be
material in the future.
31
The following table provides information about our foreign currency forward contracts
outstanding as of March 31, 2009 (in thousands, except contract rate):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Notional Value |
|
|
|
|
|
|
Average |
|
|
of Forward |
|
|
Market |
|
Forward contracts to sell foreign currencies for U.S. Dollar: |
|
Contract Rate |
|
|
Contract |
|
|
Value |
|
Australian Dollar |
|
|
1.44 |
|
|
$ |
399 |
|
|
$ |
1 |
|
Canadian Dollar |
|
|
0.79 |
|
|
|
767 |
|
|
|
(6 |
) |
Euro |
|
|
0.75 |
|
|
|
3,499 |
|
|
|
11 |
|
British Pound |
|
|
0.70 |
|
|
|
1,098 |
|
|
|
3 |
|
Item 4. Controls and Procedures
We maintain disclosure controls and procedures and internal controls that are designed to
ensure that information required to be disclosed in our current and periodic reports is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms,
and that such information is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and procedures and
internal controls, management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable and not absolute assurance of achieving the
desired control objectives. In reaching a reasonable level of assurance, management was required to
apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
In addition, the design of any system of controls is also based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any design will succeed
in achieving its stated goals under all potential future conditions; over time, controls may become
inadequate because of changes in conditions, or the degree of compliance with policies or
procedures may deteriorate. Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an
evaluation, under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended. Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and procedures were effective as
of March 31, 2009.
An evaluation was also performed under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, of any change in our
internal control over financial reporting that occurred during our last fiscal quarter and that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting. That evaluation has included certain internal control areas in which we have
made and are continuing to make changes to improve and enhance controls.
There have been no changes in our internal control over financial reporting during the quarter
ended March 31, 2009 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
32
PART II OTHER INFORMATION
Item 1. Legal Proceedings
A description of our material pending legal proceedings is disclosed in Note 10
Contingencies, of the Notes to the Consolidated Financial Statements included in Item 1 of Part I
of this report and is incorporated by reference herein. We are also engaged from time to time in
other legal actions arising in the ordinary course of our business and believe that the ultimate
outcome of these actions will not have a material adverse effect on our business, financial
condition or results of operations. However, due to the uncertainties inherent in litigation, no
assurance can be given as to the outcome of these proceedings. If any of these matters were
resolved in a manner unfavorable to us, our business, financial condition and results of operations
would be harmed.
Item 1A. Risk Factors
Set forth below and elsewhere in this quarterly report on Form 10-Q, and in other documents we file with the SEC, are descriptions of risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this report. Because of the following factors, as well as other variables affecting our operating results, past financial performance should not be considered a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods. The risks and uncertainties described below are not the only ones facing us. Other events that we do not currently anticipate or that we currently deem immaterial also may affect our results of operations and financial condition.
We have marked with an asterisk those risk factors that
reflect substantive changes from the risk factors included in our Annual Report on Form 10-K for
the year ended December 31, 2008. In addition, we have added a risk factor relating to our
revolving credit facility.
Our quarterly revenue and operating results may vary significantly in future periods and our stock
price may decline.
Our operating results have fluctuated in the past and are likely to continue to do so in the
future. Our revenues are unpredictable and may fluctuate due to changes in demand for our products,
the timing of the execution of customer contracts, the timing of milestone payments, or the failure
to achieve and receive the same, and the initiation or termination of corporate collaboration
agreements. A significant portion of our costs also can vary substantially between quarterly or
annual reporting periods. For example, the total amount of research and development costs in a
period often depends on the amount of costs we incur in connection with manufacturing developmental
lots and clinical trial lots. Moreover, a variety of factors may affect our ability to make
accurate forecasts regarding our operating results. For example, our new blood screening products,
oncology and industrial products, as well as some of our clinical diagnostic products, have a
relatively limited sales history, which limits our ability to project future sales, prices and the
sales cycles accurately. In addition, we base our internal projections of blood screening product
sales and international sales of various diagnostic products on projections prepared by our
distributors of these products and therefore we are dependent upon the accuracy of those
projections. We expect continuing fluctuations in our manufacture and shipment of blood screening
products to Novartis, which vary each period based on Novartis inventory levels and supply chain
needs. Because of all of these factors, our operating results in one or more future quarters may
fail to meet or exceed financial guidance we may provide from time to time and the expectations of
securities analysts or investors, which could cause our stock price to decline. In addition, the
trading market for our common stock will be influenced by the research and reports that industry or
securities analysts publish about our business and that of our competitors. Furthermore, failure to
achieve our operational goals may inhibit our targeted growth plans and the successful
implementation of our strategic objectives.
Our financial performance may be adversely affected by current global economic conditions.
Our business depends on the overall demand for our products and on the economic health of our
current and prospective customers. Our projected revenues and operating results are based on
assumptions concerning certain levels of customer demand. We have not experienced recent declines
in overall blood screening or clinical diagnostics customer purchases as a result of current
economic conditions, however, a continued weakening of the global and domestic economy, or a
reduction in customer spending or credit availability, could result in downward pricing pressures,
delayed or decreased purchases of our products and longer sales cycles. Furthermore, during
challenging economic times our customers may face issues gaining timely access to sufficient
credit, which could result in an impairment of their ability to make timely payments to us. If that
were to occur, we may be required to increase our allowance for doubtful accounts. If economic and
market conditions
in the United States or other key markets persist, spread, or deteriorate further, we may
experience adverse effects on our business, operating results and financial condition.
33
We are dependent on Novartis and other third parties for the distribution of some of our products.
If any of our distributors terminates its relationship with us or fails to adequately perform, our
product sales will suffer.
We rely on Novartis to distribute blood screening products we manufacture. Commercial product
sales to Novartis accounted for 46% of our total revenues during the first quarter of 2009 and 44%
of total revenues for 2008. As described above, Amendment No. 11 extends to June 30, 2025 the term
of our blood screening collaboration with Novartis under the 1998 Agreement. The 1998 Agreement was
previously scheduled to expire by its terms in 2013. The collaboration agreement can be terminated
by either party prior to the expiration of its term if the other party materially breaches the
collaboration agreement and does not cure the breach following 90 days notice, or if the other
party becomes insolvent or declares bankruptcy.
In July 2008, we were notified that certain blood screening assays manufactured by us for
Novartis and sold outside of the United States might have been improperly stored at a Novartis
third-party warehouse in Singapore. Following our established quality system, an investigation for
product performance was initiated. In August 2008, we determined that, based on the results of our
investigation to date, we could not fully assess the potential impact of these improper storage
conditions on the ultimate performance of the product without conducting additional stability
testing. As a result, we and Novartis agreed that products previously delivered to customers from
this warehousing facility should be replaced and the appropriate field actions were initiated with
customers and the regulatory authorities in the affected countries. While we did not incur charges
in connection with this event, we devoted considerable time and attention to rectifying the issues
resulting from the improper storage conditions and events such as this may harm our commercial
reputation.
Our agreement with Siemens, as assignee of Bayer, for the distribution of certain of our
products will terminate in 2010. In November 2002, we initiated an arbitration proceeding against
Bayer in connection with our clinical diagnostic collaboration. In August 2006, we entered into a
settlement agreement with Bayer regarding this arbitration and the patent litigation between the
parties. Under the terms of the settlement agreement, the parties submitted a stipulated final
award adopting the arbitrators prior interim and supplemental awards, except that Bayer was no
longer obligated to reimburse us $2.0 million for legal expenses previously awarded in the
arbitrators June 5, 2005 interim award. The arbitrator determined that the collaboration agreement
should be terminated, as we requested, except as to the qualitative HCV assays and as to
quantitative Analyte Specific Reagents, or ASRs, for HCV. As Bayers assignee, Siemens retains the
co-exclusive right to distribute the qualitative HCV tests and the exclusive right to distribute
the quantitative HCV ASR. As a result of the termination of the collaboration agreement, we
re-acquired the right to develop and market future viral assays that had been previously reserved
for Siemens. The arbitrators March 3, 2006 supplemental award determined that we are not obligated
to pay an initial license fee in connection with the sale of the qualitative HIV-1 and HCV assays
and that we will be required to pay running sales royalties, at rates we believe are generally
consistent with rates paid by other licensees of the relevant patents.
We rely upon bioMérieux for distribution of certain of our products in most of Europe and
Australia, Rebio Gen for distribution of certain of our products in Japan, and various independent
distributors for distribution of our products in other regions. Distribution rights revert back to
us upon termination of the distribution agreements. Our distribution agreement with Rebio Gen
terminates on December 31, 2010, although it may terminate earlier under certain circumstances. Our
distribution agreement with bioMérieux terminates in May 2012, although it may terminate earlier
under certain circumstances.
If any of our distribution or marketing agreements is terminated, particularly our
collaboration agreement with Novartis, or if we elect to distribute new products directly, we will
have to invest in additional sales and marketing resources, including additional field sales
personnel, which would significantly increase future selling, general and administrative expenses.
We may not be able to enter into new distribution or marketing agreements on satisfactory terms, or
at all. If we fail to enter into acceptable distribution or marketing agreements or fail to
successfully market our products, our product sales will decrease.
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If we cannot maintain our current corporate collaborations and enter into new corporate
collaborations, our product development could be delayed. In particular, any failure by us to
maintain our collaboration with Novartis with respect to blood screening would have a material
adverse effect on our business.
We rely, to a significant extent, on our corporate collaborators for funding development and
for marketing many of our products. In addition, we expect to rely on our corporate collaborators
for the commercialization of those products. If any of our corporate collaborators were to breach
or terminate its agreement with us or otherwise fail to conduct its collaborative activities
successfully and in a timely manner, the development or commercialization and subsequent marketing
of the products contemplated by the collaboration could be delayed or terminated. We cannot control
the amount and timing of resources our corporate collaborators devote to our programs or potential
products. In November 2007, for example, 3M informed us that it no longer intended to fund our
collaboration to develop rapid molecular assays for the food testing industry. We and 3M
subsequently terminated this agreement. In June 2008, 3M discontinued our collaboration to develop
assays for healthcare-associated infections. While we are currently seeking other opportunities to
commercialize our prototype assays in these fields, there is no guarantee we will be successful in
these efforts.
The continuation of any of our collaboration agreements depends on their periodic renewal by
us and our collaborators. For example, we recently entered into Amendment No. 11 with Novartis
which extends to June 30, 2025 the term of our blood screening collaboration with Novartis under
the 1998 Agreement. The 1998 Agreement was previously scheduled to expire by its terms in 2013. The
collaboration agreement can be terminated by either party prior to the expiration of its term if
the other party materially breaches the collaboration agreement and does not cure the breach
following 90 days notice, or if the other party becomes insolvent or declares bankruptcy.
If any of our current collaboration agreements is terminated, or if we are unable to renew
those collaborations on acceptable terms, we would be required to devote additional internal
resources to product development or marketing or to terminate some development programs or seek
alternative corporate collaborations. We may not be able to negotiate additional corporate
collaborations on acceptable terms, if at all, and these collaborations may not be successful. In
addition, in the event of a dispute under our current or any future collaboration agreements, such
as those under our agreements with Novartis and Siemens, a court or arbitrator may not rule in our
favor and our rights or obligations under an agreement subject to a dispute may be adversely
affected, which may have an adverse effect on our business or operating results.
We may acquire other businesses or form collaborations, strategic alliances and joint ventures
that could decrease our profitability, result in dilution to stockholders or cause us to incur
debt or significant expense, and acquired companies or technologies could be difficult to
integrate and could disrupt our business.*
As part of our business strategy, we intend to pursue acquisitions of complementary businesses
and enter into technology licensing arrangements. We also intend to pursue strategic alliances that
leverage our core technology and industry experience to expand our product offerings and geographic
presence. We have limited experience with respect to acquiring other companies. Any future
acquisitions by us could result in large and immediate write-offs or the incurrence of debt and
contingent liabilities, any of which could harm our operating results. Integration of an acquired
company also may require management resources that otherwise would be available for ongoing
development of our existing business. We may not identify or complete these transactions in a
timely manner, on a cost-effective basis, or at all. For example, in July 2008 we withdrew our
counterbid to acquire Innogenetics NV as a result of a higher offer made by Solvay Pharmaceuticals.
Prior to withdrawing our bid, our management devoted substantial time and attention to the proposed
transaction. Further, we nonetheless incurred related transaction costs, including legal,
accounting and other fees.
On April 8, 2009, we completed the acquisition of Tepnel, a company registered in England and
Wales, for approximately $137.1 million (based on the then applicable exchange rate). We believe
the Tepnel acquisition will provide us access to growth opportunities in transplant diagnostics,
genetic testing and pharmaceutical services, as well as accelerate our ongoing strategic efforts to
strengthen our marketing and sales, distribution and manufacturing capabilities in the European
molecular diagnostics market. These expectations are based upon numerous assumptions that are
subject to risks and uncertainties that could deviate materially from our estimates, and could
adversely affect our operating results.
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Managing the acquisition of Tepnel and any other future acquisitions will entail numerous
operational and financial risks, including:
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the inability to retain or replace key employees of any acquired businesses or hire enough
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the impairment of relationships with key customers of acquired businesses due to changes in
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the exposure to federal, state, local and foreign tax liabilities in connection with any
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the exposure to unknown liabilities; |
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higher than expected acquisition and integration costs that could cause our quarterly and
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increased amortization expenses if an acquisition includes significant intangible assets; |
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combining the operations and personnel of acquired businesses with our own, which could be
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integrating, or completing the development and application of, any acquired technologies
and personnel with diverse business and cultural backgrounds, which could disrupt our
business and divert our managements time and attention. |
To finance any acquisitions, we may choose to issue shares of our common stock as
consideration, which would result in dilution to our stockholders. If the price of our equity is
low or volatile, we may not be able to use our common stock as consideration to acquire other
companies. Alternatively, it may be necessary for us to raise additional funds through public or
private financings. Additional funds may not be available on terms that are favorable to us,
especially in light of current economic conditions.
Our future success will depend in part upon our ability to enhance existing products and to
develop, introduce and commercialize new products.*
The markets for our products are characterized by rapidly changing technology, evolving
industry standards and new product introductions, which may make our existing products obsolete.
Our future success will depend in part upon our ability to enhance existing products and to develop
and introduce new products. We believe that we will need to continue to provide new products that
can detect and quantify a greater number of organisms from a single sample. We also believe that we
must develop new assays that can be performed on automated instrument platforms. The development of
new instrument platforms, if any, in turn may require the modification of existing assays for use
with the new instrument, and additional time-consuming and costly regulatory approvals. For
example, our failure to successfully develop and commercialize our development-stage Panther
instrument system on a timely basis could have a negative impact on our financial performance.
The development of new or enhanced products is a complex and uncertain process requiring the
accurate anticipation of technological, market and medical practice trends, as well as precise
technological execution. In addition, the successful development of new products will depend on the
development of new technologies. We may be required to undertake time-consuming and costly
development activities and to seek regulatory approval for these new products. We may experience
difficulties that could delay or prevent the successful development, introduction and marketing of
these new products. We have experienced delays in receiving FDA clearance in the past. Regulatory
clearance or approval of any new products we may develop may not be granted by the FDA or foreign
regulatory authorities on a timely basis, or at all, and these and other new products may not be
successfully commercialized. Failure to timely achieve regulatory approval for our products and
introduce products to market could negatively impact our growth objectives and financial
performance.
In October 2006 and May 2007, the FDA granted marketing approval for use of the Procleix
Ultrio assay on eSAS and TIGRIS, respectively, to screen donated blood, plasma, organs and tissue
for HIV-1 and HCV in individual blood donations or in pools of up to 16 blood samples. In August
2008, the FDA approved the Procleix Ultrio assay to also screen donated blood, plasma, organs and
tissues for HBV in individual blood donations or in pools of up to 16 blood samples on eSAS and the
TIGRIS system. Since August 2008, existing
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customers have not transitioned from the use of the Procleix HIV-1/HCV blood screening assay
to the use of the Procleix Ultrio assay at the levels we anticipated. We believe this is
attributable in part to the FDAs current requirements for testing blood donations, which do not
currently mandate testing for HBV DNA. At its April 2009 meeting, the FDAs Blood Products Advisory
Committee, or BPAC, considered various issues concerning HBV NAT testing of donated blood. Although
we believe the BPAC discussion supported the utility of NAT testing for HBV, no formal
recommendation was made to make such testing mandatory at the meeting. We believe blood collection
centers will continue to focus on improving the safety of donated blood by adopting the most
advanced blood screening technologies available. If customers do not transition to the use of the
Procleix Ultrio assay at expected levels for any of these or other reasons, our financial
performance may be adversely affected.
We face intense competition, and our failure to compete effectively could decrease our revenues
and harm our profitability and results of operations.
The clinical diagnostics industry is highly competitive. Currently, the majority of diagnostic
tests used by physicians and other health care providers are performed by large reference, public
health and hospital laboratories. We expect that these laboratories will compete vigorously to
maintain their dominance in the diagnostic testing market. In order to achieve market acceptance of
our products, we will be required to demonstrate that our products provide accurate, cost-effective
and time saving alternatives to tests performed by traditional laboratory procedures and products
made by our competitors.
In the markets for clinical diagnostic products, a number of competitors, including Roche,
Abbott, Becton Dickinson, Siemens and bioMérieux, currently compete with us for product sales,
primarily on the basis of technology, quality, reputation, accuracy, ease of use, price,
reliability, the timing of new product introductions and product line offerings. Our existing
competitors or new market entrants may be in better position than we are to respond quickly to new
or emerging technologies, may be able to undertake more extensive marketing campaigns, may adopt
more aggressive pricing policies and may be more successful in attracting potential customers,
employees and strategic partners. Many of our competitors have, and in the future these and other
competitors may have, significantly greater financial, marketing, sales, manufacturing,
distribution and technological resources than we do. Moreover, these companies may have
substantially greater expertise in conducting clinical trials and research and development, greater
ability to obtain necessary intellectual property licenses and greater brand recognition than we
do, any of which may adversely affect our customer retention and market share.
Competitors may make rapid technological developments that may result in our technologies and
products becoming obsolete before we recover the expenses incurred to develop them or before they
generate significant revenue or market acceptance. Some of our competitors have developed real
time or kinetic nucleic acid assays and semi-automated instrument systems for those assays.
Additionally, some of our competitors are developing assays that permit the quantitative detection
of multiple analytes (or quantitative multiplexing). Although we are evaluating and/or developing
such technologies, we believe some of our competitors are further along in the development process
than we are with respect to such assays and instrumentation.
In the market for blood screening products, the primary competitor to our collaboration with
Novartis is Roche, which received FDA approval of its PCR-based NAT tests for blood screening in
December 2002. Our collaboration with Novartis also competes with blood banks and laboratories that
have internally developed assays based on PCR technology, Ortho Clinical Diagnostics, a subsidiary
of Johnson & Johnson, that markets an HCV antigen assay, and Abbott and Siemens with respect to
immunoassay products. In the future, our collaboration blood screening products also may compete
with viral inactivation or reduction technologies and blood substitutes.
Novartis, with whom we have a collaboration agreement for blood screening products, retains
certain rights to grant licenses of the patents related to HCV and HIV to third parties in blood
screening using NAT. Prior to its merger with Novartis, Chiron granted HIV and HCV licenses to
Roche in the blood screening and clinical diagnostics fields. Chiron also granted HIV and HCV
licenses in the clinical diagnostics field to Bayer Healthcare LLC (now Siemens), together with the
right to grant certain additional HIV and HCV sublicenses in the field to third parties. We believe
Bayers rights have now been assigned to Siemens as part of Bayers December 2006 sale of its
diagnostics business. Chiron also granted an HCV license to Abbott and an HIV license to Organon
Teknika (now bioMérieux) in the clinical diagnostics field. If Novartis grants additional
licenses in blood screening or Siemens grants additional licenses in clinical diagnostics,
further competition will be created for sales of HCV and HIV assays and these licenses could affect
the prices that can be charged for our products.
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We have collaboration agreements to develop NAT products for industrial testing applications. We
have limited experience operating in these markets and may not successfully develop commercially
viable products.
We have collaboration agreements to develop NAT products for detecting microorganisms in
selected water applications, and for microbiological and virus monitoring in the biotechnology and
pharmaceutical manufacturing industries. We have limited experience applying our technologies and
operating in industrial testing markets. The process of successfully developing products for
application in these markets is expensive, time-consuming and unpredictable. Research and
development programs to create new products require a substantial amount of our scientific,
technical, financial and human resources and there is no guarantee that new products will be
successfully developed. We will need to design and execute specific product development plans in
conjunction with our collaborative partners and make significant investments to ensure that any
products we develop perform properly, are cost-effective and adequately address customer needs.
Even if we develop products for commercial use in these markets, any products we develop may
not be accepted in these markets, may be subject to competition and may be subject to other risks
and uncertainties associated with these markets. For example, most pharmaceutical manufacturers
rely on culture testing of their manufacturing systems, and may be unwilling to switch to molecular
testing like that used in our recently launched MilliPROBE product to detect Pseudomonas
aeruginosa. We have no experience with customer and customer support requirements, sales cycles,
and other industry-specific requirements or dynamics applicable to these new markets and we and our
collaborators may not be able to successfully convert customers to tests using our NAT
technologies, which we expect will be more costly than existing methods. We will be reliant on our
collaborators in these markets. Our interests may be different from those of our collaborators and
conflicts may arise in these collaboration arrangements that have an
adverse effect on our ability
to develop new products. As a result of these risks and other uncertainties, we may not be able to
successfully develop commercially viable products for application in industrial testing or any
other new markets.
Failure to manufacture our products in accordance with product specifications could result in
increased costs, lost revenues, customer dissatisfaction or voluntary product recalls, any of
which could harm our profitability and commercial reputation.
Properly manufacturing our complex nucleic acid products requires precise technological
execution and strict compliance with regulatory requirements. We may experience problems in the
manufacturing process for a number of reasons, such as equipment malfunction or failure to follow
specific protocols. If problems arise during the production of a particular product lot, that
product lot may need to be discarded or destroyed. This could, among other things, result in
increased costs, lost revenues and customer dissatisfaction. If problems are not discovered before
the product lot is released to the market, we may incur recall and product liability costs. In the
past, we have voluntarily recalled certain product lots for failure to meet product specifications.
Any failure to manufacture our products in accordance with product specifications could have a
material adverse effect on our revenues, profitability and commercial reputation.
Disruptions in the supply of raw materials and consumable goods or issues associated with the
quality thereof from our single source suppliers, including Roche Molecular Biochemicals, which is
an affiliate of one of our primary competitors, could result in a significant disruption in sales
and profitability.*
We purchase some key raw materials and consumable goods used in the manufacture of our
products from single-source suppliers. Certain of our key suppliers may be experiencing
difficulties due to current economic conditions. If we cannot obtain sufficient raw materials from
our key suppliers, production of our own products may be delayed or disrupted. In addition, we may
not be able to obtain supplies from replacement suppliers on a timely or cost-effective basis, or
at all. A reduction or stoppage in supply while we seek a replacement supplier would limit our
ability to manufacture our products, which could result in a significant reduction in sales and
profitability. For example, there is currently a worldwide shortage of acetonitrile, which
we use in the production of many of our products. We believe this shortage results from
decreased worldwide production as demand falls for acetonitriles co-product, acrylonitrile (a
building block in the formulation of resins used in cars, electronic housings, and small
appliances), largely attributed to the global economic slowdown. As a result, our supply of
acetonitrile has been restricted along with many other companies worldwide. We are seeking to
implement mitigation measures to address supply shortages, however, there can be no assurance that
such measures will be successful.
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In addition, an impurity or variation from specification in any raw material we receive could
significantly delay our ability to manufacture products. Our inventories may not be adequate to
meet our production needs during any prolonged interruption of supply. We also have single source
suppliers for proposed future products. Failure to maintain existing supply relationships or to
obtain suppliers for our future products on commercially reasonable terms would prevent us
from manufacturing our products and limit our growth.
Our current supplier of certain key raw materials for our amplified NAT assays, pursuant to a
fixed-price contract, is Roche Molecular Biochemicals. We have a supply and purchase agreement for
oligonucleotides for HPV with Roche Molecular Systems. Each of these entities is an affiliate of
Roche Diagnostics GmbH, one of our primary competitors. We currently are involved in proceedings
with Digene regarding our supply and purchase agreement with Roche Molecular Systems. Digene filed
a demand for binding arbitration against Roche that challenged the validity of the supply and
purchase agreement. Digenes demand asserted, among other things, that Roche materially breached a
cross-license agreement between Roche and Digene by granting us an improper sublicense and sought a
determination that the supply and purchase agreement is null and void. On April 1, 2009, following
the arbitration hearing, the International Centre for Dispute Resolution, or ICDR, delivered the
arbitrators interim award, which rejected all claims asserted by Digene (now Qiagen Gaithersburg,
Inc.).
We have only one third-party manufacturer for each of our instrument product lines, which exposes
us to increased risks associated with production delays, delivery schedules, manufacturing
capability, quality control, quality assurance and costs.
We have one third-party manufacturer for each of our instrument product lines. KMC Systems is
the only manufacturer of our TIGRIS instrument. MGM Instruments, Inc. is the only manufacturer of
our LEADER series of luminometers. We are dependent on these third-party manufacturers, and this
dependence exposes us to increased risks associated with production delays, delivery schedules,
manufacturing capability, quality control, quality assurance and costs. We have no firm long-term
commitments from KMC Systems, MGM Instruments or any of our other manufacturers to supply products
to us for any specific period, or in any specific quantity, except as may be provided in a
particular purchase order. If KMC Systems, MGM Instruments or any of our other third-party
manufacturers experiences delays, disruptions, capacity constraints or quality control problems in
its manufacturing operations or becomes insolvent, then instrument shipments to our customers could
be delayed, which would decrease our revenues and harm our competitive position and reputation.
Further, because we place orders with our manufacturers based on forecasts of expected demand for
our instruments, if we inaccurately forecast demand we may be unable to obtain adequate
manufacturing capacity or adequate quantities of components to meet our customers delivery
requirements, or we may accumulate excess inventories.
We may in the future need to find new contract manufacturers to increase our volumes or to
reduce our costs. We may not be able to find contract manufacturers that meet our needs, and even
if we do, qualifying a new contract manufacturer and commencing volume production is expensive and
time consuming. For example, we believe qualifying a new manufacturer of our TIGRIS instrument
would take approximately 12 months. If we are required or elect to change contract manufacturers,
we may lose revenues and our customer relationships may suffer.
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We and our customers are subject to various governmental regulations, and we may incur significant
expenses to comply with, and experience delays in our product commercialization as a result of,
these regulations.*
The clinical diagnostic and blood screening products we design, develop, manufacture and
market are subject to rigorous regulation by the FDA and numerous other federal, state and foreign
governmental authorities. We generally are prohibited from marketing our clinical diagnostic
products in the United States unless we obtain either 510(k) clearance or premarket approval from
the FDA. Delays in receipt of, or failure to obtain, clearances or approvals for future products
could result in delayed, or no, realization of product revenues from new products or substantial
additional costs which could decrease our profitability.
The process of seeking and obtaining regulatory approvals, particularly from the FDA and some
foreign governmental authorities, to market our products can be costly and time consuming, and
approvals might not be granted for future products on a timely basis, if at all. In March 2008, we
started U.S. clinical trials for our investigational APTIMA HPV assay. If we experience unexpected
complications in conducting the trial, we may incur additional costs or experience delays or
difficulties in receiving FDA approval. For example, we originally expected that enrollment and
testing of approximately 7,000 women would be required to complete this trial. However, the number
of subjects we will enroll in the trial is now expected to increase based on the actual prevalence
of cervical disease among women already enrolled in the trial and other factors. In addition, we
cannot guarantee that the FDA will ultimately approve the use of our APTIMA HPV assay upon
completion of the trial. Failure to obtain FDA approval of our APTIMA HPV assay, or delays or
difficulties experienced during the clinical trial, could have a material adverse effect on our
financial performance.
We are also required to continue to comply with applicable FDA and other regulatory
requirements once we have obtained clearance or approval for a product. These requirements include,
among other things, the Quality System Regulation, labeling requirements, the FDAs general
prohibition against promoting products for unapproved or off-label uses and adverse event
reporting regulations. Failure to comply with applicable FDA product regulatory requirements could
result in, among other things, warning letters, fines, injunctions, civil penalties, repairs,
replacements, refunds, recalls or seizures of products, total or partial suspension of production,
the FDAs refusal to grant future premarket clearances or approvals, withdrawals or suspensions of
current product applications and criminal prosecution. Any of these actions, in combination or
alone, could prevent us from selling our products and harm our business.
Certain assay reagents may be sold in the United States as ASRs without 510(k) clearance or
premarket approval from the FDA. However, the FDA restricts the sale of these ASR products to
clinical laboratories certified to perform high complexity testing under the Clinical Laboratory Improvement Amendments of 1988, or
CLIA, and also restricts the types of products that can be sold
as ASRs. In addition, each laboratory must validate the ASR product for use in diagnostic
procedures as a laboratory validated assay. We currently offer ASRs for use in the detection of
PCA3 mRNA and for use in the detection of the parasite Trichomonas vaginalis. We also have
developed an ASR for quantitative HCV testing that Siemens provides to Quest Diagnostics. In
September 2007, the FDA published guidance for ASRs that define the types of products that can be
sold as ASRs. Under the terms of this guidance and the ASR Manufacturer Letter issued in June
2008 by the Office of In Vitro Diagnostic Device Evaluation and Safety at the FDA, it may be more
challenging for us to market some of our ASR products and we may be required to terminate those ASR
product sales, conduct clinical studies and make submissions of our ASR products to the FDA for
clearance or approval.
Outside the United States, our ability to market our products is contingent upon maintaining
our certification with the International Organization for Standardization, and in some cases
receiving specific marketing authorization from the appropriate foreign regulatory authorities. The
requirements governing the conduct of clinical trials, marketing authorization, pricing and
reimbursement vary widely from country to country. Our EU foreign marketing authorizations cover
all member states. Foreign registration is an ongoing process as we register additional products
and/or product modifications.
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The use of our diagnostic products is also affected by CLIA, and related federal and state
regulations that provide for regulation of laboratory testing. CLIA is intended to ensure the
quality and reliability of clinical laboratories in the United States by mandating specific
standards in the areas of personnel qualifications,
administration, participation in proficiency testing, patient test management, quality and
inspections. Current or future CLIA requirements or the promulgation of additional regulations
affecting laboratory testing may prevent some clinical laboratories from using some or all of our
diagnostic products.
Certain of the industrial testing products that we intend to develop may be subject to
government regulation, and market acceptance may be subject to the receipt of certification from
independent agencies. We will be reliant on our industrial collaborators in these markets to obtain
any necessary approvals. There can be no assurance that these approvals will be received.
As both the FDA and foreign government regulators have become increasingly stringent, we may
be subject to more rigorous regulation by governmental authorities in the future. Complying with
these rules and regulations could cause us to incur significant additional expenses and delays in
launching products, which would harm our operating results.
Our products are subject to recalls even after receiving FDA approval or clearance.
The FDA and governmental bodies in other countries have the authority to require the recall of
our products if we fail to comply with relevant regulations pertaining to product manufacturing,
quality, labeling, advertising, or promotional activities, or if new information is obtained
concerning the safety of a product. Our assay products incorporate complex biochemical reagents and
our instruments comprise complex hardware and software. We have in the past voluntarily recalled
products, which, in each case, required us to identify a problem and correct it. In December 2008,
we recalled certain AccuProbe Group B Streptococcus Test kits and AccuProbe Mycobacterium
tuberculosis Culture Identification Test kits, after receiving a customer complaint indicating the
customer had received a Group B Strep kit containing a probe reagent tube that appeared upon visual
inspection to be empty. We confirmed that a manufacturing error had occurred, corrected the
problem, recalled all potentially affected products, provided replacements and notified the FDA and
other appropriate authorities.
Although none of our past product recalls had a material adverse effect on our business, our
products may be subject to a future government-mandated recall or a voluntary recall by us, and any
such recall could divert managerial and financial resources, could be more difficult and costly to
correct, could result in the suspension of sales of our products and could harm our financial
results and our reputation.
Our gross profit margin percentage on the sale of blood screening assays will decrease upon the
implementation of smaller pool size testing.
We currently receive revenues from the sale of blood screening assays primarily for use with
pooled donor samples. In pooled testing, multiple donor samples are initially screened by a single
test. Since Novartis sells blood screening assays under our collaboration to blood collection
centers on a per donation basis, our profit margins are greater when a single test can be used to
screen multiple donor samples.
We believe certain blood screening markets are trending from pooled testing of large numbers
of donor samples to smaller pool sizes. A greater number of tests will be required in markets where
smaller pool sizes are required. Under our recently revised collaboration agreement with Novartis,
we bear half of the cost of manufacturing blood screening assays. The greater number of tests
required for smaller pool sizes will increase our variable manufacturing costs, including costs of
raw materials and labor. If the price per donor or total sales volume does not increase in line
with the increase in our total variable manufacturing costs, our gross profit margin percentage
from sales of blood screening assays will decrease upon adoption of smaller pool sizes. We have
already observed this trend with respect to certain sales internationally. We are not able to
predict accurately the ultimate extent to which our gross profit margin percentage will be
negatively affected as a result of smaller pool sizes, because we do not know the ultimate selling
price that Novartis would charge to the end user or the degree to which smaller pool size testing
will be adopted across the markets in which our products are sold.
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Because we depend on a small number of customers for a significant portion of our total revenues,
the loss of any of these customers or any cancellation or delay of a large purchase by any of
these customers could significantly reduce our revenues.
Historically, a limited number of customers has accounted for a significant portion of our
total revenues, and we do not have any long-term commitments with these customers, other than our
collaboration agreement with Novartis. Revenues from our blood screening collaboration with
Novartis accounted for 48% of our total revenues during the first quarter of 2009 and 48% of our
total revenues for 2008. Our blood screening collaboration with Novartis is largely dependent on
two large customers in the United States, The American Red Cross and Americas Blood Centers,
although we did not receive any revenues directly from those entities. Novartis was our only
customer that accounted for greater than 10% of our total revenues for the first quarter of 2009.
Various state and city public health agencies accounted for an aggregate of 8% of our total
revenues during the first quarter of 2009 and 8% of total revenues for 2008. Although state and
city public health agencies are legally independent of each other, we believe they tend to act
similarly with respect to their product purchasing decisions. We anticipate that our operating
results will continue to depend to a significant extent upon revenues from a small number of
customers. The loss of any of our key customers, or a significant reduction in sales volume or
pricing to those customers, could significantly reduce our revenues.
Intellectual property rights on which we rely to protect the technologies underlying our products
may be inadequate to prevent third parties from using our technologies or developing competing
products.
Our success will depend in part on our ability to obtain patent protection for, or maintain
the secrecy of, our proprietary products, processes and other technologies for development of blood
screening and clinical diagnostic products and instruments. Although we had more than 480 United
States and foreign patents covering our products and technologies as of March 31, 2009, these
patents, or any patents that we may own or license in the future, may not afford meaningful
protection for our technology and products. The pursuit and assertion of a patent right,
particularly in areas like nucleic acid diagnostics and biotechnology, involve complex
determinations and, therefore, are characterized by substantial uncertainty. In addition, the laws
governing patentability and the scope of patent coverage continue to evolve, particularly in
biotechnology. As a result, patents might not issue from certain of our patent applications or from
applications licensed to us. Our existing patents will expire by March 15, 2027 and the patents we
may obtain in the future also will expire over time.
The scope of any of our issued patents may not be broad enough to offer meaningful protection.
In addition, others may challenge our current patents or patents we may obtain in the future and,
as a result, these patents could be narrowed, invalidated or rendered unenforceable, or we may be
forced to stop using the technology covered by these patents or to license technology from third
parties.
The laws of some foreign countries may not protect our proprietary rights to the same extent
as do the laws of the United States. Any patents issued to us or our collaborators may not provide
us with any competitive advantages, and the patents held by other parties may limit our freedom to
conduct our business or use our technologies. Our efforts to enforce and maintain our intellectual
property rights may not be successful and may result in substantial costs and diversion of
management time. Even if our rights are valid, enforceable and broad in scope, third parties may
develop competing products based on technology that is not covered by our patents.
In addition to patent protection, we also rely on copyright and trademark protection, trade
secrets, know-how, continued technological innovation and licensing opportunities. In an effort to
maintain the confidentiality and ownership of our trade secrets and proprietary information, we
require our employees, consultants, advisors and others to whom we disclose confidential
information to execute confidentiality and proprietary information and inventions agreements.
However, it is possible that these agreements may be breached, invalidated or rendered
unenforceable, and if so, there may not be an adequate corrective remedy available. Furthermore,
like many companies in our industry, we may from time to time hire scientific personnel formerly
employed by other companies involved in one or more areas similar to the activities we conduct. In
some situations, our confidentiality and proprietary information and inventions agreements may
conflict with, or be subject to, the rights of third parties with whom our employees, consultants
or advisors have prior employment or consulting relationships. Although we require our employees
and consultants to maintain the confidentiality of all confidential information of previous
employers, we or these individuals may be subject to allegations of trade secret misappropriation
or other similar claims as a result of their prior affiliations. Finally, others may independently
develop substantially equivalent proprietary information and techniques, or otherwise gain access
to our trade secrets. Our failure to protect our proprietary information and techniques may
inhibit or limit our ability to exclude certain competitors from the market and execute our
business strategies.
42
The diagnostic products industry has a history of patent and other intellectual property
litigation, and we have been and may continue to be involved in costly intellectual property
lawsuits.*
The diagnostic products industry has a history of patent and other intellectual property
litigation, and these lawsuits likely will continue. From time-to-time in the ordinary course of
business, we receive communications from third parties calling our attention to patents or other
intellectual property rights owned by them, with the implicit or explicit suggestion that we may
need to acquire a license of such rights. We have faced in the past, and may face in the future,
patent infringement lawsuits by companies that control patents for products and services similar to
ours or other lawsuits alleging infringement by us of their intellectual property rights. In order
to protect or enforce our intellectual property rights, we may have to initiate legal proceedings
against third parties. Legal proceedings relating to intellectual property typically are expensive,
take significant time and divert managements attention from other business concerns. The cost of
this litigation could adversely affect our results of operations, making us less profitable.
Further, if we do not prevail in an infringement lawsuit brought against us, we might have to pay
substantial damages, including treble damages, and we could be required to stop the infringing
activity or obtain a license to use the patented technology.
Recently, we have been involved in a number of patent-related disputes with third parties. In
December 2006, Digene filed a demand for binding arbitration against Roche with the ICDR of the
American Arbitration Association in New York. Digenes demand asserted, among other things, that
Roche materially breached a cross-license agreement between Roche and Digene by granting us an
improper sublicense and sought a determination that our supply and purchase agreement with Roche is
null and void. In July 2007, the ICDR arbitrators granted our petition to join the arbitration. On
April 1, 2009, following the arbitration hearing, the ICDR delivered the arbitrators interim award,
which rejected all claims asserted by Digene (now Qiagen Gaithersburg, Inc.).
Pursuant to our June 1998 collaboration agreement with Novartis, we hold certain rights in the
blood screening and clinical diagnostics fields under patents originally issued to Novartis
covering the detection of HIV. We sell a qualitative HIV test in the clinical diagnostics field and
we manufacture tests for HIV for use in the blood screening field, which Novartis sells under
Novartis brands and name. In February 2005, the U.S. Patent and Trademark Office declared two
interferences related to U.S. Patent No. 6,531,276 (Methods For Detecting Human Immunodeficiency
Virus Nucleic Acid), originally issued to Novartis. The first interference was between Novartis
and the National Institutes of Health, or NIH, and pertained to U.S. Patent Application No.
06/693,866 (Cloning and Expression of HTLV-III DNA). The second interference was between Novartis
and Institut Pasteur, and pertained to Institut Pasteurs U.S. Patent Application No. 07/999,410
(Cloned DNA Sequences, Hybridizable with Genomic RNA of Lymphadenopathy-Associated Virus (LAV)).
We are informed that the Patent and Trademark Office determined that Institut Pasteur invented the
subject matter at issue prior to NIH and Novartis. We are also informed that Novartis and NIH
subsequently filed actions in the United States District Court for the District of Columbia
challenging the decisions of the Patent and Trademark Office in the patent interference cases. From
November 2007 through June 2008, the parties engaged in settlement negotiations and then notified
the court that they had signed a memorandum of understanding prior to the negotiation of final,
definitive settlement documents. On May 16, 2008, we signed a license agreement with Institut
Pasteur concerning Institut Pasteurs intellectual property for the molecular detection of HIV,
covering products manufactured and sold through, and under, our brands or name. On June 27, 2008,
the parties to the pending litigation in the United States District Court for the District of
Columbia informed the court that they were unable to reach a final, definitive agreement and
intended to proceed with litigation. There can be no assurances as to the ultimate outcome of the
interference litigation and no assurances as to how the outcome of the interference litigation may
affect the patent rights we licensed from Institut Pasteur, or Novartis right to sell the HIV blood
screening tests.
Our indebtedness could adversely affect our financial health.
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. In March 2009, we and Bank of America amended the credit
facility to increase the amount which we may borrow from time to time under the credit agreement
from $180.0 million to $250.0 million. As of March 31, 2009, there was $170.0 million in borrowings outstanding under the revolving credit
facility. In April 2009, we used $137.1 million of borrowings under the revolving credit facility to fund our
acquisition of Tepnel and borrowed an additional $70.0 million under the revolving
credit facility bringing the total principal amount outstanding to $240.0 million.
43
Our indebtedness could have important consequences. For example, it could:
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increase our vulnerability to general adverse economic and industry conditions; |
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have a material adverse effect on our business and financial condition if we are unable to
service our indebtedness or refinance such indebtedness; |
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limit our flexibility in planning for, or reacting to, changes in our business and the
industry in which we operate; |
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place us at a disadvantage compared to our competitors that have less indebtedness; and |
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expose us to higher interest expense in the event of increases in interest rates because
indebtedness under our credit facility bears interest at a variable rate. |
In addition, we must comply with certain affirmative and negative covenants under the credit
agreement, including covenants that limit or restrict our ability to, among other things, merge or
consolidate, change our business, and permit the borrowings to exceed a specified borrowing base,
subject to certain exceptions as set forth in the credit agreement. If we default under the senior
secured credit facility, because of a covenant breach or otherwise, the outstanding amounts
thereunder could become immediately due and payable.
We may be subject to future product liability claims that may exceed the scope and amount of our
insurance coverage, which would expose us to liability for uninsured claims.
While there is a federal preemption defense against product liability claims for medical
products that receive premarket approval from the FDA, we believe that no such defense is available
for our products that we market under a 510(k) clearance. As such, we are subject to potential
product liability claims as a result of the design, development, manufacture and marketing of our
clinical diagnostic products. Any product liability claim brought against us, with or without
merit, could result in the increase of our product liability insurance rates. In addition, our
insurance policies have various exclusions, and thus we may be subject to a product liability claim
for which we have no insurance coverage, in which case, we may have to pay the entire amount of any
award. In addition, insurance varies in cost and can be difficult to obtain, and we may not be able
to obtain insurance in the future on terms acceptable to us, or at all. A successful product
liability claim brought against us in excess of our insurance coverage may require us to pay
substantial amounts, which could harm our business and results of operations.
We are exposed to risks associated with acquisitions and other long-lived and intangible assets
that may become impaired and result in an impairment charge.
As of March 31, 2009, we had approximately $230.7 million of long-lived assets, including
$12.8 million of capitalized software, net of accumulated amortization, relating to our TIGRIS
instrument, goodwill of $18.6 million, a $5.4 million investment in Qualigen, Inc., and $51.1
million of capitalized licenses and manufacturing access fees, patents, purchased intangibles and
other long term assets. Additionally, we had $73.6 million of land and buildings, $16.1 million of
building improvements, $52.9 million of equipment and furniture and fixtures and $0.2 million in
construction in progress. The substantial majority of our long-lived assets are located in the
United States. The carrying amounts of long-lived and intangible assets are affected whenever
events or changes in circumstances indicate that the carrying amount of any asset may not be
recoverable.
These events or changes might include a significant decline in market share, a significant
decline in profits, rapid changes in technology, significant litigation, an inability to
successfully deliver an instrument to the marketplace and attain customer acceptance or other
matters. Adverse events or changes in circumstances may affect the estimated undiscounted future
operating cash flows expected to be derived from long-lived and intangible assets. If at any time
we determine that an impairment has occurred, we will be required to reflect the impaired value as
a charge, resulting in a reduction in earnings in the quarter such impairment is identified and a
corresponding reduction in our net asset value. A material reduction in earnings resulting from
such a charge could cause us to fail to be profitable in the period in which the charge is taken or
otherwise fail to meet the expectations of investors and securities analysts, which could cause the
price of our stock to decline.
44
In June 2008, we recorded an impairment charge for the net capitalized balance of $3.5 million
under our license agreement with Corixa. In the second quarter of 2008, a series of events
indicated that future alternative uses of the capitalized intangible asset were unlikely and that
recoverability of the asset through future cash flows was not considered likely enough to support
continued capitalization. These second quarter 2008 indicators of impairment included decisions on
our planned commercial approach for oncology diagnostic products, the completion of a detailed
review of the intellectual property suite acquired from Corixa, including our assessment of the
proven clinical utility for a majority of the related markers, and the potential for near term
sublicense income that could be generated from the intellectual property acquired.
During the quarter ended September 30, 2008, we recorded a $1.6 million other-than-temporary
loss relating to our investment in Qualigen. In making this determination, we considered a number
of factors, including, among others, the share price from the companys latest financing round, the
performance of the company in relation to its own operating targets and business plan, the
companys revenue and cost trends, the companys liquidity and cash position, including its cash
burn rate, market acceptance of the companys products and services, new products and/or services
that the company may have forthcoming, any significant news specific to the company, the companys
competitors and industry, the outlook of the overall industry in which the company operates and a
third party valuation report.
Future changes in financial accounting standards or practices, or existing taxation rules or
practices, may cause adverse unexpected revenue or expense fluctuations and affect our reported
results of operations.
A change in accounting standards or practices, or a change in existing taxation rules or
practices, can have a significant effect on our reported results and may even affect our reporting
of transactions completed before the change is effective. New accounting pronouncements and
taxation rules and varying interpretations of accounting pronouncements and taxation practice have
occurred and may occur in the future. Changes to existing rules or the questioning of current
practices may adversely affect our reported financial results or the way we conduct our business.
Our effective tax rate can also be impacted by changes in estimates of prior years items, past and
future levels of research and development spending, the outcome of audits by federal, state and
foreign jurisdictions and changes in overall levels of income before tax.
We expect to continue to incur significant research and development expenses, which may make it
difficult for us to maintain profitability.
In recent years, we have incurred significant costs in connection with the development of
blood screening and clinical diagnostic products, as well as our TIGRIS and Panther instrument
systems. We expect our expense levels to remain high in connection with our research and
development as we seek to continue to expand our product offerings and continue to develop products
and technologies in collaboration with our partners. As a result, we will need to continue to
generate significant revenues to maintain profitability. Although we expect our research and
development expenses as a percentage of revenue to decrease in future periods, we may not be able
to generate sufficient revenues to maintain profitability in the future. Our failure to maintain
profitability in the future could cause the market price of our common stock to decline.
Our marketable securities are subject to market and investment risks which may result in a loss of
value.
We engage one or more third parties to manage some of our cash consistent with an investment
policy that restricts investments to securities of high credit quality, with requirements placed on
maturities and concentration by security type and issue. These investments are intended to preserve
principal while providing liquidity adequate to meet our projected cash requirements. Risks of
principal loss are intended to be minimized through diversified short and medium term investments
of high quality, but these investments are not, in every case, guaranteed or fully insured. In
light of recent changes in the credit market, some high quality short term investment securities,
similar to the types of securities that we invest in, have suffered illiquidity, events of default
or deterioration in credit quality. If our short term investment portfolio becomes affected by any
of the foregoing or other adverse events, we may incur losses relating to these investments.
45
We may not have financing for future capital requirements, which may prevent us from addressing
gaps in our product offerings or improving our technology.
Although historically our cash flow from operations has been sufficient to satisfy working
capital, capital expenditure and research and development requirements, we may in the future need
to incur debt or issue equity in order to fund these requirements, as well as to make acquisitions
and other investments. If we cannot obtain debt or equity financing on acceptable terms or are
limited with respect to incurring debt or issuing equity, including as a result of current economic
conditions, we may be unable to address gaps in our product offerings or improve our technology,
particularly through acquisitions or investments.
If we raise funds through the issuance of debt or equity, any debt securities or preferred
stock issued will have rights, preferences and privileges senior to those of holders of our common
stock in the event of a liquidation and may contain other provisions that adversely affect the
rights of the holders of our common stock. The terms of any debt securities may impose restrictions
on our operations. If we raise funds through the issuance of equity or debt convertible into
equity, this issuance would result in dilution to our stockholders.
If we or our contract manufacturers are unable to manufacture our products in sufficient
quantities, on a timely basis, at acceptable costs and in compliance with regulatory requirements,
our ability to sell our products will be harmed.
Our products must be manufactured in sufficient quantities and on a timely basis, while
maintaining product quality and acceptable manufacturing costs and complying with regulatory
requirements. In determining the required quantities of our products and the manufacturing
schedule, we must make significant judgments and estimates based on historical experience,
inventory levels, current market trends and other related factors. Because of the inherent nature
of estimates, there could be significant differences between our estimates and the actual amounts
of products we and our distributors require, which could harm our business and results of
operations.
Significant additional work will be required for scaling-up manufacturing of each new product
prior to commercialization, and we may not successfully complete this work. Manufacturing and
quality control problems have arisen and may arise in the future as we attempt to scale-up our
manufacturing of a new product, and we may not achieve scale-up in a timely manner or at a
commercially reasonable cost, or at all. In addition, although we expect some of our newer products
and products under development to share production attributes with our existing products,
production of these newer products may require the development of new manufacturing technologies
and expertise. We may be unable to develop the required technologies or expertise.
The amplified NAT tests that we produce are significantly more expensive to manufacture than
our non-amplified products. As we continue to develop new amplified NAT tests in response to market
demands for greater sensitivity, our product costs will increase significantly and our margins may
decline. We sell our products in a number of cost-sensitive market segments, and we may not be able
to manufacture these more complex amplified tests at costs that would allow us to maintain our
historical gross margin percentages. In addition, new products that detect or quantify more than
one target organism will contain significantly more complex reagents, which will increase the cost
of our manufacturing processes and quality control testing. We or other parties we engage to help
us may not be able to manufacture these products at a cost or in quantities that would make these
products commercially viable. If we are unable to develop or contract for manufacturing
capabilities on acceptable terms for our products under development, we will not be able to conduct
pre-clinical, clinical and validation testing on these product candidates, which will prevent or
delay regulatory clearance or approval of these product candidates.
Blood screening and clinical diagnostic products are regulated by the FDA as well as other
foreign medical regulatory bodies. In some cases, such as in the United States and the European
Union, certain products may also require individual lot release testing. Maintaining compliance
with multiple regulators, and multiple centers within the FDA, adds complexity and cost to our
overall manufacturing processes. In addition, our manufacturing facilities and those of our
contract manufacturers are subject to periodic regulatory inspections by the FDA and other federal
and state regulatory agencies, and these facilities are subject to Quality System
Regulations requirements of the FDA. We or our contractors may fail to satisfy these
regulatory requirements in the future, and any failure to do so may prevent us from selling our
products.
46
Our sales to international markets are subject to additional risks.
Sales of our products outside the United States accounted for 20% of our total revenues during
the first quarter of 2009 and 23% of our total revenues for 2008. Sales by Novartis of
collaboration blood screening products outside of the United States accounted for 70% of our
international revenues during the first quarter of 2009 and 78% in 2008. Novartis has
responsibility for the international distribution of collaboration blood screening products.
We encounter risks inherent in international operations. We expect a significant portion of
our sales growth, especially with respect to blood screening products, to come from expansion in
international markets. If the value of the United States dollar increases relative to foreign
currencies, our products could become less competitive in international markets. Our international
sales also may be limited or disrupted by:
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the imposition of government controls; |
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export license requirements; |
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economic and political instability; |
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price controls; |
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trade restrictions and tariffs; |
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differing local product preferences and product requirements; and |
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changes in foreign medical reimbursement and coverage policies and programs. |
In addition, we anticipate that requirements for smaller pool sizes of blood samples will
result in lower gross margin percentages, as additional tests are required to deliver the sample
results. We have already observed this trend with respect to certain sales in Europe. In general,
international pool sizes are smaller than domestic pool sizes and, therefore, growth in blood
screening revenues attributed to international expansion has led and will continue to lead to lower
gross margin percentages.
If third-party payors do not reimburse our customers for the use of our clinical diagnostic
products or if they reduce reimbursement levels, our ability to sell our products will be harmed.
We sell our clinical diagnostic products primarily to large reference laboratories, public
health institutions and hospitals, substantially all of which receive reimbursement for the health
care services they provide to their patients from third-party payors, such as Medicare, Medicaid
and other government programs, private insurance plans and managed care programs. Most of these
third-party payors may deny reimbursement if they determine that a medical product was not used in
accordance with cost-effective treatment methods, as determined by the third-party payor, or was
used for an unapproved indication. Third-party payors may also refuse to reimburse for experimental
procedures and devices.
Third-party payors reimbursement policies may affect sales of our products that screen for
more than one pathogen at the same time, such as our APTIMA Combo 2 product for screening for the
causative agents of chlamydial infections and gonorrhea in the same sample. Third-party payors may
choose to reimburse our customers on a per test basis, rather than on the basis of the number of
results given by the test. This may result in reference laboratories, public health institutions
and hospitals electing to use separate tests to screen for each disease so that they can receive
reimbursement for each test they conduct. In that event, these entities likely would purchase
separate tests for each disease, rather than products that test for more than one microorganism.
In addition, third-party payors are increasingly attempting to contain health care costs by
limiting both coverage and the level of reimbursement for medical products and services. Levels of
reimbursement may decrease in the future, and future legislation, regulation or reimbursement
policies of third-party payors may adversely affect the demand for and price levels of our
products. If our customers are not reimbursed for our products, they may reduce or discontinue
purchases of our products, which would cause our revenues to decline.
47
We are dependent on technologies we license, and if we fail to maintain our licenses or license
new technologies and rights to particular nucleic acid sequences for targeted diseases in the
future, we may be limited in our ability to develop new
products.*
We are dependent on licenses from third parties for some of our key technologies. For example,
our patented Transcription-Mediated Amplification technology is based on technology we have
licensed from Stanford University. We enter into new licensing arrangements in the ordinary course
of business to expand our product portfolio and access new technologies to enhance our products and
develop new products. Many of these licenses provide us with exclusive rights to the subject
technology or disease marker. If our license with respect to any of these technologies or markers
is terminated for any reason, we may not be able to sell products that incorporate the technology.
In addition, we may lose competitive advantages if we fail to maintain exclusivity under an
exclusive license.
Our ability to develop additional diagnostic tests for diseases may depend on the ability of
third parties to discover particular sequences or markers and correlate them with disease, as well
as the rate at which such discoveries are made. Our ability to design products that target these
diseases may depend on our ability to obtain the necessary rights from the third parties that make
any of these discoveries. In addition, there are a finite number of diseases and conditions for
which our NAT assays may be economically viable. If we are unable to access new technologies or the
rights to particular sequences or markers necessary for additional diagnostic products on
commercially reasonable terms, we may be limited in our ability to develop new diagnostic products.
Our products and manufacturing processes require access to technologies and materials that may
be subject to patents or other intellectual property rights held by third parties. We may discover
that we need to obtain additional intellectual property rights in order to commercialize our
products. We may be unable to obtain such rights on commercially reasonable terms or at all, which
could adversely affect our ability to grow our business.
If we fail to attract, hire and retain qualified personnel, we may not be able to design, develop,
market or sell our products or successfully manage our business.
Competition for top management personnel is intense and we may not be able to recruit and
retain the personnel we need. The loss of any one of our management personnel or our inability to
identify, attract, retain and integrate additional qualified management personnel could make it
difficult for us to manage our business successfully, attract new customers, retain existing
customers and pursue our strategic objectives. Although we have employment agreements with our
executive officers, we may be unable to retain our existing management. We do not maintain key
person life insurance for any of our executive officers.
Competition for skilled sales, marketing, research, product development, engineering, and
technical personnel is intense and we may not be able to recruit and retain the personnel we need.
The loss of the services of key personnel, or our inability to hire new personnel with the
requisite skills, could restrict our ability to develop new products or enhance existing products
in a timely manner, sell products to our customers or manage our business effectively.
If a natural or man-made disaster strikes our manufacturing facilities, we will be unable to
manufacture our products for a substantial amount of time and our sales will decline.
We manufacture substantially all of our products in our two manufacturing facilities located
in San Diego, California. These facilities and the manufacturing equipment we use would be costly
to replace and could require substantial lead time to repair or replace. Our facilities may be
harmed by natural or man-made disasters, including, without limitation, earthquakes and fires, and
in the event they are affected by a disaster, we would be forced to rely on third-party
manufacturers. The wildfires in San Diego in October 2007 required that we temporarily shut down
our facility for the manufacture of blood screening products. In the event of a disaster, we may
lose customers and we may be unable to regain those customers thereafter. Although we possess
insurance for damage to our property and the disruption of our business from casualties, this
insurance may not be
sufficient to cover all of our potential losses and may not continue to be available to us on
acceptable terms, or at all.
48
If we use biological and hazardous materials in a manner that causes injury or violates laws, we
may be liable for damages.
Our research and development activities and our manufacturing activities involve the
controlled use of infectious diseases, potentially harmful biological materials, as well as
hazardous materials, chemicals and various radioactive compounds. We cannot completely eliminate
the risk of accidental contamination or injury, and we could be held liable for damages that result
from any contamination or injury. In addition, we are subject to federal, state and local laws and
regulations governing the use, storage, handling and disposal of these materials and specified
waste products. The damages resulting from any accidental contamination and the cost of compliance
with environmental laws and regulations could be significant.
The anti-takeover provisions of our certificate of incorporation and by-laws, and provisions of
Delaware law, could delay or prevent a change of control that our stockholders may favor.
Provisions of our amended and restated certificate of incorporation and amended and restated
bylaws may discourage, delay or prevent a merger or other change of control that our stockholders
may consider favorable or may impede the ability of the holders of our common stock to change our
management. The provisions of our amended and restated certificate of incorporation and amended and
restated bylaws, among other things:
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divide our board of directors into three classes, with members of each class to be
elected for staggered three-year terms; |
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limit the right of stockholders to remove directors; |
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regulate how stockholders may present proposals or nominate directors for election at
annual meetings of stockholders; and |
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authorize our board of directors to issue preferred stock in one or more series, without
stockholder approval. |
In addition, because we have not chosen to be exempt from Section 203 of the Delaware General
Corporation Law, this provision could also delay or prevent a change of control that our
stockholders may favor. Section 203 provides that, subject to limited exceptions, persons that
acquire, or are affiliated with a person that acquires, more than 15 percent of the outstanding
voting stock of a Delaware corporation shall not engage in any business combination with that
corporation, including by merger, consolidation or acquisitions of additional shares, for a
three-year period following the date on which that person or its affiliate crosses the 15 percent
stock ownership threshold.
If we do not effectively manage our growth, it could affect our ability to pursue opportunities
and expand our business.
Growth in our business has placed and may continue to place a significant strain on our
personnel, facilities, management systems and resources. We will need to continue to improve our
operational and financial systems and managerial controls and procedures and train and manage our
workforce. We will have to maintain close coordination among our various departments. If we fail to
effectively manage our growth, it could adversely affect our ability to pursue business
opportunities and expand our business.
Information technology systems implementation issues could disrupt our internal operations and
adversely affect our financial results.
Portions of our information technology infrastructure may experience interruptions, delays or
cessations of service or produce errors in connection with ongoing systems implementation work. In
particular, we implemented a new enterprise resource planning software system to replace our
various legacy systems. To more fully realize the potential of this system, we are continually
reassessing and upgrading processes and this may be more expensive, time consuming and resource
intensive than planned. Any disruptions that may occur in the operation of this system or any
future systems could increase our expenses and adversely affect our ability to report in an
accurate and timely manner the results of our consolidated operations, our financial position and
cash
flow and to otherwise operate our business, which could adversely affect our financial
results, stock price and reputation.
49
Our forecasts and other forward looking statements are based upon various assumptions that are
subject to significant uncertainties that may result in our failure to achieve our forecasted
results.
From time to time in press releases, conference calls and otherwise, we may publish or make
forecasts or other forward looking statements regarding our future results, including estimated
earnings per share and other operating and financial metrics. Our forecasts are based upon various
assumptions that are subject to significant uncertainties and any number of them may prove
incorrect. For example, our revenue forecasts are based in large part on data and estimates we
receive from our collaboration partners and distributors. Our achievement of any forecasts depends
upon numerous factors, many of which are beyond our control. Consequently, our performance may not
be consistent with management forecasts. Variations from forecasts and other forward looking
statements may be material and could adversely affect our stock price and reputation.
Compliance with changing corporate governance and public disclosure regulations may result in
additional expenses.
Changing laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq Global Select
Market rules, are creating uncertainty for companies such as ours. To maintain high standards of
corporate governance and public disclosure, we have invested, and intend to invest, in all
reasonably necessary resources to comply with evolving standards. These investments have resulted
in increased general and administrative expenses and a diversion of management time and attention
from revenue-generating activities and may continue to do so in the future.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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Total Number |
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of Shares |
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Purchased |
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Approximate |
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as Part of |
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Dollar Value of |
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Publicly |
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Shares that May |
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Total Number |
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Average |
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Announced |
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Yet Be Purchased |
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of Shares |
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Price Paid |
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Plans or |
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Under the Plans or |
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Purchased |
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Per Share |
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Programs |
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Programs |
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January 1-31, 2009 |
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603,200 |
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$ |
41.41 |
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603,200 |
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$ |
150,000,000 |
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February 1-28, 2009 |
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150,000,000 |
|
March 1-31, 2009 |
|
|
272,486 |
|
|
|
39.20 |
|
|
|
271,600 |
|
|
|
139,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (1) (2) |
|
|
875,686 |
|
|
|
40.72 |
|
|
|
874,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In August 2008, our Board of Directors authorized the repurchase of up
to $250.0 million of our common stock over the two years following
adoption of the program, through negotiated or open market
transactions. There is no minimum or maximum number of shares to be
repurchased under the program. |
|
(2) |
|
During the first quarter of 2009, we repurchased and retired 886
shares of our common stock, at an average price of $39.00, withheld by
us to satisfy employee tax obligations upon vesting of restricted
stock granted under our 2003 Incentive Award Plan. We may make similar
repurchases in the future to satisfy employee tax obligations upon
vesting of restricted stock. As of March 31, 2009, we had an aggregate
of 249,040 shares of restricted stock and 80,000 shares of deferred
issuance restricted stock awards outstanding. |
50
Item 6. Exhibits
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
Recommended Cash Offer for Tepnel Life Sciences plc. |
|
|
|
|
|
Implementation Agreement dated as of January 30, 2009 by and between Gen-Probe
Incorporated and Tepnel Life Sciences plc. |
|
|
|
|
|
Form of Amended and Restated Certificate of Incorporation of Gen-Probe Incorporated. |
|
|
|
|
|
Certificate of Amendment of Amended and Restated Certificate of Incorporation of
Gen-Probe Incorporated. |
|
|
|
|
|
Amended and Restated Bylaws of Gen-Probe Incorporated. |
|
|
|
|
|
Certificate of Elimination of Series A Junior Participating Preferred Stock of
Gen-Probe Incorporated. |
|
|
|
|
|
Specimen common stock certificate. |
|
|
|
|
|
Amendment No. 11 effective January 1, 2009 to the Agreement dated June 11, 1998
between Gen-Probe Incorporated and Chiron Corporation (now Novartis Vaccines and
Diagnostics, Inc.).** |
|
|
|
|
|
Employment Offer Letter effective January 30, 2009 between Gen-Probe Incorporated
and Eric Lai, Ph.D. |
|
|
|
|
|
2009 Gen-Probe Employee Bonus Plan. |
|
|
|
|
|
Credit Agreement dated as of February 27, 2009 by and between Gen-Probe
Incorporated, as Borrower, and Bank of America, N.A., as Lender. |
|
|
|
|
|
Security Agreement (Securities) dated as of February 27, 2009 by Gen-Probe
Incorporated in favor of Bank of America, N.A. |
|
|
|
|
|
Amendment to Credit Agreement dated as of March 23, 2009 by and between Gen-Probe
Incorporated, as Borrower, and Bank of America, N.A., as Lender. |
|
|
|
|
|
Certification dated May 6, 2009, of Principal Executive Officer required pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|
|
|
|
|
Certification dated May 6, 2009, of Principal Financial Officer required pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|
|
|
|
|
Certification dated May 6, 2009, of Principal Executive Officer required pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |
|
|
|
|
|
Certification dated May 6, 2009, of Principal Financial Officer required pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |
|
|
|
|
|
Filed herewith. |
|
|
|
Indicates management contract or compensatory plan, contract or arrangement. |
|
** |
|
Gen-Probe has requested confidential treatment with respect to certain portions of this
exhibit. |
51
|
|
|
(1) |
|
Incorporated by reference to Gen-Probes Current Report on Form 8-K filed with the SEC on
January 30, 2009. |
|
(2) |
|
Incorporated by reference to Gen-Probes Current Report on Form 8-K filed with the SEC on
February 5, 2009. |
|
(3) |
|
Incorporated by reference to Gen-Probes Amendment No. 2 to Registration Statement on Form 10
filed with the SEC on August 14, 2002. |
|
(4) |
|
Incorporated by reference to Gen-Probes Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2004 filed with the SEC on August 9, 2004. |
|
(5) |
|
Incorporated by reference to Gen-Probes Current Report on Form 8-K filed with the SEC on
February 18, 2009. |
|
(6) |
|
Incorporated by reference to Gen-Probes Annual Report on Form 10-K for the year ended
December 31, 2006 filed with the SEC on February 23, 2007. |
|
(7) |
|
Incorporated by reference to Gen-Probes Current Report on Form 8-K filed with the SEC on
February 4, 2009. |
|
(8) |
|
Incorporated by reference to Gen-Probes Current Report on Form 8-K filed with the SEC on
March 4, 2009. |
|
(9) |
|
Incorporated by reference to Gen-Probes Current Report on Form 8-K filed with the SEC on
March 25, 2009. |
52
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
GEN-PROBE INCORPORATED
|
|
DATE: May 6, 2009 |
By: |
/s/ Henry L. Nordhoff
|
|
|
|
Henry L. Nordhoff |
|
|
|
Chairman and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
|
DATE: May 6, 2009 |
By: |
/s/ Herm Rosenman
|
|
|
|
Herm Rosenman |
|
|
|
Senior Vice President Finance and Chief
Financial Officer (Principal Financial Officer and
Principal Accounting Officer) |
|
|
53