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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended December 31, 2004 | ||
| or | ||
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from to | ||
Commission file number: 0-21872
Gen-Probe Incorporated
(Exact name of registrant as specified in its charter)
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Delaware
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33-0044608 | |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
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10210 Genetic Center Drive, San Diego, CA (Address of principal executive office) |
92121-4362 (Zip Code) |
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Registrant’s telephone number, including area code:
(858) 410-8000
Securities registered pursuant to Section 12(b) of the
Act:
| Title of Each Class | Name of Each Exchange on Which Registered | |
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None
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None |
Securities to be registered pursuant to Section 12(g) of
the Act:
Common Stock, par value $.0001 per share
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act
Rule 12b-2). Yes þ No o
As of June 30, 2004, the last business day of the
registrant’s most recently completed second fiscal quarter,
the aggregate market value of the registrant’s common stock
held by non-affiliates of the registrant was approximately
$2.3 billion, based on the closing price of the
registrant’s common stock on the Nasdaq National Market on
June 30, 2004 of $47.32 per share.
As of March 1, 2005, 50,402,454 shares of
registrant’s common stock, $0.0001 par value, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s definitive Proxy Statement to be
filed with the Securities and Exchange Commission within
120 days after close of the fiscal year are incorporated by
reference into Part III of this report.
GEN-PROBE INCORPORATED
TABLE OF CONTENTS
FORM 10-K
For the Year Ended December 31, 2004
INDEX
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PART I
TRADEMARKS AND TRADE NAMES
ACCUPROBE®, APTIMA®, APTIMA COMBO 2®,
DTStm,
GEN-PROBE®, LEADER®, PACE®, TIGRIS®,
TMAtm
and our other logos and trademarks are the property of Gen-Probe
Incorporated. PROCLEIX® and
ULTRIOtm
are trademarks of Chiron Corporation. VERSANT® is a
trademark of Bayer Corporation. All other brand names or
trademarks appearing in this Annual Report on Form 10-K are
the property of their respective holders. Use or display by us
of other parties’ trademarks, trade dress or products in
this Annual Report is not intended to, and does not imply a
relationship with, or endorsements or sponsorship of, us by the
trademark or trade dress owners.
FORWARD-LOOKING STATEMENTS
This Annual Report and the information incorporated herein by
reference contain forward-looking statements that involve a
number of risks and uncertainties, as well as assumptions that,
if they never materialize or prove incorrect, could cause our
results to differ materially from those expressed or implied by
such forward-looking statements. Although our forward-looking
statements reflect the good faith judgment of our management,
these statements can only be based on facts and factors
currently known by us. Consequently, forward-looking statements
are inherently subject to risks and uncertainties, and actual
results and outcomes may differ materially from results and
outcomes discussed in the forward-looking statements.
Forward-looking statements can be identified by the use of
forward-looking words such as “believes,”
“expects,” “hopes,” “may,”
“will,” “plans,” “intends,”
“estimates,” “could,” “should,”
“would,” “continue,” “seeks,”
“pro forma” or “anticipates,” or other
similar words (including their use in the negative), or by
discussions of future matters such as the development of new
products, technology enhancements, possible changes in
legislation and other statements that are not historical. These
statements include but are not limited to statements under the
captions “Business,” “Risk Factors,” and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” as well as other
sections in this Annual Report. You should be aware that the
occurrence of any of the events discussed under the heading
“Item 1. Business — Risk Factors” and
elsewhere in this Annual Report could substantially harm our
business, results of operations and financial condition. If any
of these events occurs, the trading price of our common stock
could decline and you could lose all or a part of the value of
your shares of our common stock.
The cautionary statements made in this Annual Report are
intended to be applicable to all related forward-looking
statements wherever they may appear in this Annual Report. We
urge you not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Annual
Report.
| Item 1. | Business |
Overview
We are a global leader in the development, manufacture and
marketing of rapid, accurate and cost-effective nucleic acid
probe-based products used for the clinical diagnosis of human
diseases and for screening donated human blood. Founded in 1983,
we pioneered the scientific and commercial development of
nucleic acid testing, or NAT. By utilizing nucleic acid probes
that specifically bind to nucleic acid sequences known to be
unique to target organisms, NAT enables detection of
microorganisms that are difficult or time-consuming to detect
with traditional laboratory methods. We have received United
States Food and Drug Administration, or FDA, approvals or
clearances for a broad portfolio of products that use our
patented technologies to detect a variety of infectious
microorganisms, including those causing sexually transmitted
diseases, tuberculosis, strep throat, pneumonia and fungal
infections. Our FDA-approved human immunodeficiency virus
(type 1), or HIV-1, assay, hepatitis C virus, or HCV,
assay, and our investigational test for West Nile virus, our
Procleix WNV assay, are currently utilized to screen over 80% of
the United States donated blood supply for HIV-1, HCV and WNV.
In addition, our TIGRIS DTS instrument, or TIGRIS
instrument, is the only integrated, fully-automated,
high-throughput instrument approved for NAT testing in clinical
diagnostic applications by the FDA. The TIGRIS instrument is
also currently used for investigational use in blood screening
applications
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in the United States and is approved in Europe for use with our
Procleix Ultrio assay. We have more than 20 years of
nucleic acid detection research and product development
experience, and our products are used daily in clinical
laboratories and blood collection centers throughout the world.
We generate revenues primarily from sales of clinical diagnostic
and blood screening assays. Our clinical diagnostic products are
marketed to clinical laboratories, public health institutions
and hospitals in the United States and Canada through our direct
sales and service force of approximately 49 representatives. Our
blood screening products are marketed and distributed by Chiron
Corporation, or Chiron. In addition, we have agreements with
Bayer, bioMérieux and Fujirebio, through its subsidiary
Rebio Gen, Inc., to market some of our products in various
global markets. In addition to product sales, we also generate
revenues through research collaborations with government
organizations and healthcare companies and through licensing of
our patented NAT technologies.
We have achieved a leading position in the industry because of
our technologically advanced and reliable NAT assays and
instruments and the capabilities of our sales force and
technical support group. Our investment in research and
development has enabled us to develop a portfolio of proprietary
and patented technologies that we combine to create NAT products
to meet our customers’ changing needs for rapid, accurate
and cost-effective assays. We also have worked with outside
vendors to develop a range of instrument systems to perform our
assays.
We have developed what we believe to be the world’s first
fully automated, integrated, high-throughput, NAT instrument
system, the TIGRIS instrument. We believe the TIGRIS instrument
significantly reduces labor costs and contamination risks in
high-volume diagnostic testing environments and also enables
large blood collection centers to individually test donors’
blood. The TIGRIS instrument is intended initially for clinical
diagnostic applications. In December 2003, we received
approval from the FDA for sexually transmitted disease, or STD,
testing on the TIGRIS instrument using our APTIMA Combo 2
assay. We have developed and manufacture the only FDA-approved
blood screening assay for the simultaneous detection of HIV-1
and HCV, the Procleix HIV-1/HCV assay, which is marketed by
Chiron. We have also developed the Procleix Ultrio assay, in
collaboration with Chiron, which adds an assay for
hepatitis B virus, or HBV, to the previously FDA-approved
Procleix HIV-1/HCV assay. In January 2004, the Procleix
Ultrio assay, running on our semi-automated instrument system,
received its Conformite Europeene, or CE, mark which permitted
Chiron to launch the product in the European Economic Area. We
filed a Biologics License Application, or BLA, for our Procleix
Ultrio assay for use on our semi-automated Procleix system and
our TIGRIS instrument, with the FDA in the third quarter of
2004. The TIGRIS instrument, and our Procleix Ultrio assay for
use on the TIGRIS instrument, received CE marks in
December 2004. We filed a BLA with the FDA for our Procleix
WNV assay in January 2005 for use on our TIGRIS instrument
and our semi-automated instrument platform.
We were incorporated under the laws of the state of Delaware in
1987. In September 2002, we were spun off from Chugai
Pharmaceutical, Ltd., our former indirect parent, as a separate,
stand-alone company. Our common stock began trading on the
Nasdaq National Market on September 16, 2002.
We make available free of charge on or through our Internet
website our annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and all
amendments to those reports as soon as reasonably practicable
after such material is electronically filed with or furnished to
the Securities and Exchange Commission. Our Internet address is
http://www.gen-probe.com. The information contained in, or that
can be accessed through, our website is not part of this Annual
Report.
Technology
Nucleic acid testing technology is based on detection of unique
portions of nucleic acids, which store and transfer genetic
information in all living organisms. The two main types of
nucleic acids are deoxyribonucleic acid, or DNA, and ribonucleic
acid, or RNA. DNA functions as a stable repository of genetic
information, while RNA typically serves to transfer the
information stored within DNA to the cell’s machinery for
making proteins.
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DNA and RNA are both composed of chains of chemical subunits
called nucleotides. There are four types of nucleotides in DNA,
which differ in one chemical part called a base. The four
different bases are: adenine, thymine, guanine and cytosine
(abbreviated A, T, G and C). These four nucleotides form the
building blocks of all DNA. The sequence of the individual A, T,
G and C nucleotides in a DNA molecule encodes the genetic
information that instructs the cell how to make particular
proteins. Because DNA sequences determine which proteins a cell
will make, the differences in a cell’s DNA sequences make
the cells of one organism differ from the cells of another.
Most DNA in cells exists in the form of a double-stranded
structure that resembles a twisted ladder. In double-stranded
DNA, the nucleotides on opposite sides of the ladder are always
paired in a precise way. An “A” nucleotide binds only
to a “T” nucleotide on the opposite strand, and vice
versa. Likewise, a “G” nucleotide binds only to a
“C” nucleotide, and vice versa. Each combination of an
“A” nucleotide with a “T” nucleotide (or a
“C” with a “G”) is referred to as a
“base pair.” The way in which each type of nucleotide
binds only to one other type of nucleotide is called
“complementary base pairing.” As a result of
complementary base pairing, the sequence of nucleotides on one
strand of a DNA molecule necessarily determines the sequence of
nucleotides on the opposite strand.
The “attraction” of a nucleotide sequence to its
complementary sequence allows a scientist to use pieces of
nucleic acid as probes to detect the presence of a target
nucleic acid in a test sample. If two complementary pieces of
DNA (or RNA) are present in a solution under the right
conditions, the complementary bases will come together and bind
to form double strands. This method is commonly known as
“nucleic acid hybridization.” Nucleic acid
hybridization techniques can be applied in a diagnostic test to
detect an infectious organism (the target organism) by the use
of a probe that is designed to bind specifically to a nucleic
acid sequence known to be unique to the target organism. The
sample suspected of containing the infectious organism is
treated to break open the organism, release its nucleic acids
into the solution, and render them single-stranded, if
necessary. The specific probe is then added, and conditions
conducive to hybridization are established.
If the target organism is present in the sample, the probe
should bind to the target organism’s nucleic acids because
the sequence of the probe has been designed to be complementary
to them. By attaching a detectable label to a probe, it is
possible to determine how much, if any, probe has bound to
sequences from the target organism.
Current Market Opportunity
| Overview |
The NAT market developed in response to a need for more rapid,
sensitive and specific diagnostic tests for the detection of
infectious microorganisms than were previously available using
traditional laboratory procedures, such as culture and
immunoassays. Culture methods require the growth of a
microorganism in a controlled medium and can take several days
or longer to yield a definitive diagnostic result. By contrast,
nucleic acid probes, which specifically bind to nucleic acid
sequences that are known to be unique to the target organisms,
can generally deliver a diagnostic result in just hours. For
example, culture tests for Mycobacterium tuberculosis can
take six to eight weeks for a traditional culture-based
diagnosis, compared to only a few hours for NAT. The greater
sensitivity and increased specificity of NAT allows for the
detection of the presence of a lower concentration of the target
organism and helps clinicians distinguish between harmful and
benign microorganisms, even when the organisms are closely
related, reducing the potential for “false negative”
results and thus the number of undiagnosed individuals or
individuals who are incorrectly diagnosed as having the disease.
For example, the greater sensitivity of amplified NAT allows for
the rapid, direct detection of a target organism like
Chlamydia trachomatis in urine, even when it is present
in low concentrations. In addition, without amplified NAT, more
invasive methods of collection like cervical or urethral swabs
must be used.
According to Boston Biomedical Consultants, Inc., the worldwide
in vitro diagnostic, or IVD, NAT market in 2004, was
approximately $1.9 billion. While NAT represents only a
small portion of the estimated $28 billion worldwide IVD
market, it is the fastest growing segment. Boston Biomedical
Consultants, Inc.,
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reported that the worldwide NAT market grew approximately 17%
from 2003 to 2004. We focus our business on market opportunities
in two principal segments of the NAT market, clinical
diagnostics and blood screening. The clinical diagnostic market
currently accounts for the majority of our NAT sales. According
to Sannes and Associates, Inc., our products represented
approximately 53% of the total chlamydia and gonorrhea tests
sold in the United States in 2004. In addition, according to a
January 2004 survey by the Centers for Disease Control and
Prevention, or CDC, our sales represented approximately 75% of
the United States amplified tuberculosis testing market at that
time. We also are exploring opportunities to develop products to
address emerging segments of the NAT market. The diagram below
illustrates existing and emerging worldwide NAT markets with
some examples of product targets of Gen-Probe and others within
each category.
| The Product Categories in Which We Compete |
Clinical Diagnostics for the Detection of Non-Viral
Microorganisms. NAT assays currently are used to detect the
microorganisms causing various STDs, including chlamydia and
gonorrhea, as well as those causing various other infectious
diseases, such as Mycobacterium tuberculosis,
Group A Streptococcus and Group B Streptococcus.
Chlamydia, the common name for the condition of infection with
the bacterium Chlamydia trachomatis, is the most
prevalent bacterial sexually transmitted infection in the United
States, with an estimated 2.8 million new cases in the
United States each year according to the CDC. The clinical
consequences of undiagnosed and untreated chlamydia infections
include pelvic inflammatory disease, ectopic pregnancy and
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infertility. Gonorrhea, the disease caused by the bacterium
Neisseria gonorrhoeae, is the second most frequently
reported bacterial STD in the United States, according to the
CDC. The CDC estimates that each year approximately 700,000
people in the United States develop gonorrhea. Untreated
gonorrhea is also a major cause of pelvic inflammatory disease,
which may lead to infertility or abnormal pregnancies. In
addition, recent data suggest that gonorrhea facilitates HIV
transmission. Chlamydia and gonorrhea infections frequently
co-exist, complicating the clinical differential diagnosis.
Because chlamydia and gonorrhea infections are often
asymptomatic, screening programs are important in high-risk
populations such as sexually active men and women between the
ages of 15 and 25. Currently, most of the testing for chlamydia
and gonorrhea occurs in the United States.
Tuberculosis, or TB, the disease caused by the microorganism
Mycobacterium tuberculosis, remains one of the deadliest
diseases in the world. The World Health Organization, or WHO,
estimates that each year there are more than eight million new
cases of tuberculosis worldwide and approximately two million
people die from the disease. Group B Streptococcus, or GBS,
represents a major infectious cause of illness and death in
newborns in the United States and can cause epilepsy, cerebral
palsy, visual impairment, permanent brain damage and
retardation. Group A Streptococcus, or GAS, is the cause of
“strep” throat, which if left untreated may cause
serious complications, such as rheumatic fever and rheumatic
heart disease.
Clinical Diagnostics for the Detection of Viral
Microorganisms. NAT assays can be used to detect viral DNA
or RNA in a patient sample. These tests can be qualitative,
meaning that the tests simply provide a “yes-no”
answer for the presence or absence of the virus, or
quantitative, meaning that the quantity of virus is determined
in the patient sample. Quantitative tests are useful in
monitoring the efficacy of treatments to reduce the amount of
virus in circulation. NAT assays currently are used to detect
viruses such as HIV, HCV and HBV.
HIV is the virus responsible for acquired immune deficiency
syndrome, or AIDS. In 2003, there were approximately 930,000
reported cases of AIDS in the United States, according to the
CDC. Individuals with AIDS show progressive deterioration of
their immune systems and become increasingly susceptible to
various diseases, including many that rarely pose a threat to
healthy individuals.
HCV is a blood-borne pathogen posing one of the greatest health
threats in developing countries. According to WHO, about 80% of
newly infected patients progress to develop chronic infection,
which can lead to both cirrhosis and liver cancer. In addition,
WHO reports that approximately 170 million people are
infected worldwide with HCV. According to the CDC, an estimated
3.9 million people in the United States have been infected
with HCV, of whom 2.7 million are chronically infected.
The CDC estimates that almost 73,000 additional people in the
United States are infected with HBV each year. Chronic HBV
infection can lead to the development of severe, potentially
fatal complications, such as cirrhosis of the liver.
Blood Screening. We believe the field of blood screening
is one of the fastest growing areas for NAT assays. According to
WHO, approximately 80 million units of blood are drawn
annually worldwide. Before being used for transfusion, blood
must be screened to ensure that it does not contain infectious
agents. The most serious threats to recipients of donated blood
are HIV, HCV and HBV. There is also growing concern over the
presence of other viruses in the donated blood supply, including
WNV, parvo B19 and hepatitis A virus, or HAV. In the
United States, most blood collection centers perform NAT
screening of donated blood by taking samples from individual
units of blood and then combining these samples into pools of 16
or 24 samples. These pooled samples are then tested to determine
whether HIV or HCV is present. If the presence of a virus is
detected, additional testing is then conducted to determine
which sample in the pool contains the virus. Some of our
customers, such as the United States military, test blood units
individually rather than in pools.
Prior to the introduction of NAT for blood screening, blood
collection centers used immunoassays to determine the presence
of blood-borne pathogens through the detection of virus-specific
antibodies and viral antigens. These tests either directly
detect the viral antigens or detect antibodies formed by the
body in response to the virus. Consequently, if the donor has
not developed detectable antibodies or detectable
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amounts of viral antigens as of the time of the donation,
recipients of that blood may be unwittingly exposed to serious
disease. In the case of HIV-1, antibodies are detectable in the
blood approximately 22 days after infection. With HCV, the
window between the time of infection and the detection of the
antibodies is much longer, approximately 70 days or more.
NAT technology can narrow both windows significantly through
amplification and detection of the nucleic acid material of the
viruses themselves rather than requiring the development of
detectable levels of antibodies or viral antigens. According to
the CDC, NAT will reduce the window period for HIV-1 detection
from 22 days for tests relying on HIV-1 antibodies to
12 days. We believe that NAT reduces the window period for
HCV detection by approximately 50%, compared to tests relying on
HCV antibodies. We believe that individual donor testing, or
IDT, NAT assays may reduce the window period for HBV detection
by up to 42%, compared to HBV antibody tests for detection of
HBV surface antigen. We also believe that the only effective
means of accomplishing individual donor testing, or IDT, with
HBV is using our TIGRIS instrument. IDT on our TIGRIS instrument
was recently demonstrated as part of our Procleix
WNV TIGRIS Investigational New Drug application, or IND,
for IDT.
| Industry Growth Trends |
Adoption of amplified screening technology. We believe
that the market for clinical diagnostic products for the
detection of non-viral microorganisms, particularly STDs, will
expand due to the adoption of amplified screening technology.
Target amplification is particularly advantageous when screening
for the presence of a microorganism when the level of that
microorganism in clinical samples might be insufficient to
permit detection with other methods. While many potential
carriers of STDs forego diagnosis due to the current invasive
methods of testing, we believe amplified NAT technology, which
can use samples collected non-invasively, such as urine, will
expand screening of high-risk populations and asymptomatic
individuals. We believe expansion of the screening of these
populations will be accelerated by adoption of guidelines by the
Health Plan Employer Data and Information Set, or HEDIS, an
organization that provides information about, and
recommendations to, managed health care organizations, that call
for routine screening of certain populations, such as women
between the ages of 16 and 25, to improve early detection
and treatment of chlamydia.
Advances in automated testing. We believe that the
introduction of automated instrumentation, such as our TIGRIS
instrument, will facilitate growth in both the clinical
diagnostics and blood screening segments of the NAT market. It
is becoming increasingly difficult for clinical laboratories to
recruit and retain skilled laboratory technologists. Within the
STD segment, we anticipate that demand for automated testing
will increase as the technology is applied to diagnose new
target viral microorganisms, including human papillomavirus, or
HPV, which has been linked to cervical cancer, and the herpes
simplex virus. The rate of market growth for testing additional
STD-related microorganisms will depend heavily upon automation,
as well as continuing advances in testing methodologies that
address the issues of specificity, sensitivity, contamination,
ease of use, time to results and overall cost effectiveness.
Additionally, we believe there will be significant demand for
automation if blood collection centers begin the screening of
individual blood donations, rather than the current widespread
practice of testing of pooled samples, in an effort to further
improve the safety of the nation’s blood supply. Individual
unit screening at larger blood centers currently is impractical
without automated instrumentation because of the throughput
limitations of current semi-automated instruments. We believe
that the availability of automation will encourage adoption of
additional blood screening tests, such as tests for HBV and WNV.
Responsiveness to newly emerging threats. We believe that
our ability to respond rapidly to the emergence of new
infectious diseases, such as WNV, will contribute to the growth
of our blood screening and diagnostic businesses. Our platform
of generic reagents and assay formats allows us to rapidly
develop new assays for our blood screening or diagnostic
businesses as soon as we know the genetic sequence of a new
organism.
Increased focus on safety of blood supply. We believe
blood collection centers will continue to focus on improving the
safety of donated blood by adopting the most advanced blood
screening technologies available. In addition, we believe that
some blood collection centers will seek to adopt individual
donor testing for some
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or all organisms, rather than the testing of pooled samples, as
automated instrumentation technologies make such testing
feasible. During the peak period of the WNV season in 2004, some
blood centers used our technology and assays, under an
investigational exemption, for individual unit testing.
Approximately 1200 infected units have been intercepted using
our WNV assay since July of 2003.
Growth in viral load testing. We expect increased
monitoring of patients on antiviral therapies to contribute to
the growth in the market for NAT products. Antiviral therapies
are managed by periodic measurement of the concentration of
virus present in the blood, or the “viral load.”
Monitoring the viral load can be used to determine when therapy
is appropriate, to monitor the course of therapy and to
determine the optimal time for a change in therapy. NAT tests
can also provide additional information useful in managing
patients with these viral infections, including identification
of subtypes that are known to be resistant to certain antiviral
agents or that are associated with different responses to
certain treatments. The primary viral infections for which viral
monitoring is useful include those caused by HIV, HCV and HBV.
Nucleic acid viral load tests for HIV have been widely adopted
by clinical laboratories over the past seven years, but we
expect market growth in the short-term because of the
introduction of new therapies and increased testing worldwide.
In addition, we expect increases in monitoring for HCV in
connection with the emergence of new antiviral therapies for
HCV. Numerous research programs exist today in anti-viral
therapy, with novel anti-viral therapeutics in development that
have the potential to produce additional diagnostic
opportunities. As these therapies are developed and marketed, we
expect a corresponding increase in demand for NAT products to
monitor the efficacy of these therapies.
Development of emerging markets for NAT technology. We
believe markets will continue to develop for new applications
for NAT technology in both clinical and non-clinical fields.
Among clinical fields, we believe NAT technology will be
utilized in the areas of new analytes, such as cancer diagnosis,
genetic predisposition testing and pharmacogenomics, which
involves the study of the relationship between nucleic acid
variations and an individual’s response to a particular
drug.
New markers to detect the presence of cancer cells in tumors are
being discovered at an ever-increasing rate, and we believe that
once these markers have been clinically validated, there will be
a large market for NAT-based cancer diagnostic products. Our
license and collaboration agreement with DiagnoCure and our
license agreement with Corixa Corporation, or Corixa, could
represent an innovative application of our NAT technology to
detect genetic markers in urine for prostate cancer. These
markers are called PCA3 (DD3) and AMACR, respectively.
We believe that NAT diagnostic assays will be used in the field
of pharmacogenomics to screen patients prior to administering
new drugs. Many genetic variations are caused by a single
mutation in nucleic acid sequence, a so-called “single
nucleotide polymorphism,” or SNP. Individuals with a
specific SNP in a drug metabolism gene may not respond to a drug
or may have an adverse reaction to that drug because the body
may not metabolize the drug in a normal fashion. We believe the
emergence of pharmacogenomics and individually targeted
therapeutics will create opportunities for diagnostic companies
to develop tests to detect genetic variations that affect
responses to drug therapies.
Genetic testing to identify individuals at risk of certain
diseases and pathological syndromes is emerging as an additional
market for NAT technology. NAT-based testing for SNPs and other
genetic anomolies can be used to determine an individual’s
predisposition to such conditions as thrombosis or
bloodclotting. Our license of bioMérieux’s
intellectual property rights for the factor V and prothrombin
mutation tests could allow us to access this market.
Emerging non-clinical markets for NAT include water, food,
beverage, bioterrorism, pharmaceutical manufacturing, personal
care products manufacturing and environmental testing. Today,
these markets predominately use traditional methods for
microbiological testing, such as culture. However, we believe
NAT testing has the potential to provide more rapid and
efficient tests in this new market.
Improvements in Detection Technologies. Current amplified
nucleic acid tests generally provide an “end point”
result, requiring that the amplification and detection processes
are completed before a result is obtained. New technology now in
development is likely to permit kinetic or “real time”
detection of target
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analytes as amplification proceeds, permitting conclusions to be
drawn before the amplification process is complete, and thereby
reducing the time to an “end point” result. Real time
detection methods also offer the advantage of providing both a
qualitative and quantitative result from a single test.
Our Competitive Strengths
Our competitive strengths form the foundation for our business
and position us to compete effectively within the NAT market.
| Proprietary Core Technologies |
We believe that we have developed one of the broadest arrays of
core NAT technologies in the industry. Our products incorporate
these technologies, which, in combination, have significantly
advanced NAT assays, making them more specific, more sensitive,
easier to use and faster than products based on competing NAT
technologies. For example, our proprietary
Transcription-Mediated Amplification, or TMA, technology offers
significant advantages over other available amplification
methods, including Polymerase Chain Reaction, or PCR. We believe
TMA technology allows our products to offer a higher degree of
sensitivity, less risk of contamination and greater ease of use
than our competitors’ amplification products. We believe
our target capture technology, which is used to extract specific
target sequences from a complex clinical specimen, can remove
inhibitory substances that interfere with amplification, can be
easily automated, and can be performed in an extremely short
duration of time. In the past, we have leveraged our core
technologies to develop products that have achieved leading
positions in new NAT markets, such as blood screening and
tuberculosis testing. We plan to continue to use our core NAT
technologies, and technologies that we may acquire, as a
platform for the development of additional products addressing
emerging segments of the NAT market.
| Extensive Product and Intellectual Property Portfolio |
We believe that we are unique in offering our customers a broad
portfolio of both non-amplified and amplified NAT assays, as
well as multiple instrumentation platforms on which to perform
our NAT assays. Our expertise in NAT products has enabled us to
develop FDA-approved products for the detection of
microorganisms causing infectious diseases. In February 2002, we
received FDA approval for our Procleix HIV-1/ HCV assay, which
is currently utilized to screen over 80% of the United States
donated blood supply for HIV-1 and HCV. Prior to FDA approval,
our Procleix HIV-1/ HCV assay was used pursuant to IND
protocols. In 2004, we conducted clinical testing in United
States blood centers of our WNV assay to detect the virus in
freshly donated human blood. Our NAT assays currently are
performed on our proprietary luminometers and our semi-automated
Direct Tube Sampling, or DTS, and TIGRIS (in the case of our
APTIMA Combo 2 and Procleix Ultrio assays) instruments. Our
products and technologies are covered by 390 United States and
foreign patents, and we proactively pursue an aggressive patent
strategy designed to protect both existing products and new
innovations.
| Innovative Product Research and Development |
We pioneered the development of the NAT market with our
introduction of the first FDA-approved probe-based assay in
1985. As of January 31, 2005, our world-class research and
development group consisted of more than 225 employees, 92 of
whom hold advanced degrees. From our PACE family of products to
our amplified APTIMA Combo 2 assay, which can detect both
chlamydia infections and gonorrhea in urine samples from
symptomatic or asymptomatic patients, our scientists have
developed proprietary assays that have brought significant
innovation to the market for NAT clinical diagnostics. To
complement these products, we have developed and continue to
develop instrumentation technologies that enable our customers
to increase throughput while improving accuracy in a
cost-effective manner. We have developed what we believe to be
the world’s first fully automated, integrated,
high-throughput, NAT instrument system, known as the TIGRIS
instrument. Our current initiatives to expand our position in
clinical diagnostics and blood screening while applying our core
NAT technologies to cancer detection, genetic testing
pharmacogenomics and industrial testing, are consistent with our
philosophy of designing innovative products to meet the existing
needs of our customers as well as the emerging needs of new
markets.
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| Brand Recognition |
We believe that we benefit from significant brand name
recognition and customer loyalty among laboratories and
physicians in the market for NAT assays. We believe our history
of technological innovation, quality manufacturing,
comprehensive sales capabilities and commitment to customer
support has resulted in customer satisfaction and retention. We
estimate that greater than 90% of our STD product sales during
2004 were to repeat customers. We believe that our brand name
also facilitates market acceptance of our new products,
providing us with opportunities for growth. Since 1998, the
American Red Cross has used us as its sole source for NAT assays
for blood screening, which is an example of our standing in the
industry.
| Sales and Technical Support Capabilities |
As of January 31, 2005, our direct sales force consisted of
approximately 31 representatives and an 18-member technical
field support group. We believe that these individuals comprise
one of the most knowledgeable and effective sales and support
organizations in the molecular diagnostics industry. Our sales
representatives have an average of 15 years of overall
sales experience, with an average of six years focused on sales
of NAT products. We view our long-standing relationships with
laboratory customers and the value-added services that our sales
force and technical field specialist group offer, including
technical product assistance, customer support and new product
training, as central to our success in the United States
clinical diagnostics market. We complement our sales force with
leading international distributors and the direct sales
organizations of our collaborative partners.
| Regulatory, Clinical and Quality Assurance Experience |
Our products, design control and manufacturing processes are
regulated by numerous third parties, including the FDA, foreign
governments, independent standards auditors and customers. Our
team of approximately 99 regulatory, clinical and quality
systems professionals has successfully led us through multiple
quality and compliance audits. We began production in our blood
screening product manufacturing facility in 1999. This facility
meets the strict standards set by the FDA’s Center for
Biologics Evaluation and Research, or CBER, for the production
of blood screening products. In addition, we have obtained ISO
9001 and EN 13485 certification from the TUV, a global leader in
independent testing and assessment services. We believe our
expertise in regulatory, clinical and quality assurance and our
manufacturing facilities enables us to efficiently and
effectively design, manufacture and secure approval for new
products and technologies that meet the rigorous standards set
by governing bodies and our customers.
Our Growth Strategy
We have successfully created and maintained a leadership
position in the NAT testing market. From this strong position,
we plan to grow our business through the following strategies:
| Establish Leadership Positions in New Markets by Leveraging Our Core Technologies |
We have had a successful track record in identifying new market
opportunities and becoming the market leader in a number of NAT
testing segments by providing innovative product solutions based
on our proprietary technology base. In the past we have utilized
our patented technology portfolio, innovation and market
development expertise to establish leadership positions in a
number of areas, including chlamydia, gonorrhea and tuberculosis
testing. Our ability to strategically identify and assume
leadership roles in new markets was evidenced by our entrance
into the blood screening market. We successfully developed the
first FDA-approved NAT assay for HIV-1/ HCV detection, our
Procleix HIV-1/ HCV assay, which is currently used to screen
over 80% of the United States donated blood supply. Our WNV
assay, which is available for use by United States blood centers
for investigational clinical testing of the virus in freshly
donated human blood, also is currently being used to screen more
than 80% of the United States blood supply. We developed the WNV
assay for use in conjunction with our TIGRIS instrument to
enable high volume IDT in the blood screening market. We
received CE mark clearance for the use of the Procleix Ultrio
assay in conjunction with our TIGRIS instrument for Europe,
which represents the first fully automated blood screening NAT
system
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cleared for commercial distribution in Europe. We currently are
exploring opportunities and expect to develop new products for
emerging NAT markets. We developed our first cancer-related
product, a TMA-based assay for the detection of chronic
myelogenous leukemia, or CML, and commercialized it in Japan.
Our license and collaboration agreements with DiagnoCure and
Corixa could represent an innovative application of our NAT
technology to detect new, highly specific genetic markers for
prostate cancer. In the industrial market, we developed a NAT
assay for Listeria monocytogenes, a food pathogen, that
is used by the dairy industry in Europe, and a NAT assay for
mycoplasma that is used by tissue culture facilities to detect
contamination of cell lines. We also are evaluating additional
product opportunities in genetics, pharmacogenomics, food and
industrial testing.
| Deliver Proprietary Automated and Fully Integrated Systems for NAT Assays |
We will continue to develop instruments that complement our
established product lines in clinical diagnostics and blood
screening. For example, we have developed and received FDA
approval for STD testing on the TIGRIS instrument. The TIGRIS
instrument should significantly reduce the time, labor costs,
risk of contamination and complexity associated with performing
NAT assays and blood screening. We believe that the increased
utility of this platform will lead to significant advances in
both the clinical diagnostics and blood screening markets. The
automation and increased throughput of the TIGRIS instrument
will enable blood collection centers to process the large
testing volumes necessary to screen each individual unit of
donated blood for the presence of life-threatening viruses. In
addition to the TIGRIS instrument, we currently are developing
other next-generation systems to meet customers’ needs for
increased productivity. Ultimately, we believe this approach of
providing our customers with the latest generation of systems
solutions will allow us to sustain and reinforce our market
position and brand recognition.
| Expand Our Menu of NAT Probe Assays through Innovative Research and Development |
We will continue to use a systems approach to product
development, which involves combining elements of our core
proprietary technologies to create products that best meet our
customers’ needs. For example, our APTIMA Combo 2 assay,
which was launched in August 2001, integrates over 20 of our
proprietary technologies. The Procleix Ultrio assay, which we
developed in collaboration with Chiron, adds an assay for HBV to
the previously approved Procleix HIV-1/ HCV assay and is
designed to detect the presence of all known HIV-1 groups and
subtypes and HCV and HBV genotypes in human plasma during the
very early stages of infection, when those agents are present
but cannot be detected by immunodiagnostic tests. By
understanding how our technologies complement one another and by
combining reagents in our new products, we expect to capitalize
on the substantial product development work that went into some
of our prior products. We believe that this approach and our
experience in bringing FDA-approved products to market will
reduce development cycle times for new products. This, in turn,
will help us expand our menu of clinical diagnostic and blood
screening products available to be performed on the instruments
we place with our customers.
| Pursue Future Licensing and Acquisition Opportunities |
We historically have supplemented our internal research and
development efforts by obtaining licenses to new technologies.
To maintain our leadership position in NAT testing, we intend to
selectively obtain rights to complementary technologies through
licenses and acquisitions. For us to enter emerging NAT markets
such as cancer testing, genetics, pharmacogenomics and
industrial testing, we may need to obtain rights to new
technologies and disease markers, as these markers are
discovered and clinically validated by third parties. For
example, in 2003, we acquired a majority of the outstanding
shares of Molecular Light Technology Limited and its
subsidiaries, providing us with a base for operations in Europe.
We also signed a license and collaboration agreement with
DiagnoCure to develop an innovative urine test to detect the
PCA3 gene marker for prostate cancer. In addition, in November
2004, we signed an exclusive option agreement with Qualigen,
Inc. to develop a point-of-use NAT testing platform using
Qualigen’s FDA-approved FastPack® technology. In
December 2004, we entered into a license agreement with AdnaGen
AG, or AdnaGen, under which we received an exclusive license to
AdnaGen technology that may help increase the accuracy of
molecular diagnostic tests for prostate and other cancers. In
addition, in December 2004 we entered into a license
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agreement with Corixa Corporation pursuant to which we received
rights to approximately 50 potential genetic markers in the
areas of prostate, ovarian, kidney, lung, colon and other
cancers.
| Expand Collaborative Relationships to Accelerate New Product Development and Enhance Our Global Marketing Capabilities |
We will pursue collaborative relationships that enable us to
implement our strategies, particularly with respect to the
development of new products and entry into new markets. We seek
to partner with industry leaders who can offer access to
intellectual property or who can complement our
commercialization capabilities by distributing co-developed
products through their sales organizations. For example, our
collaboration with Chiron for the blood screening market has
allowed us to combine our NAT technology with Chiron’s
patent portfolio relating to HCV and to leverage Chiron’s
distribution and sales resources.
Our Proprietary NAT Technologies
We have developed technologies that make NAT assays practical
and effective for commercial use, thereby overcoming many of the
limitations of previous DNA probe assays that restricted their
use to research laboratories. Our products incorporate a
combination of patented technologies that have significantly
advanced NAT assays, making them more specific, more sensitive,
easier to use and faster than products based on competing
technologies. These technologies include the following:
| • | targeting of ribosomal RNA, or rRNA | |
| • | target capture/nucleic acid extraction technology, | |
| • | Transcription-Mediated Amplification technology, and | |
| • | chemiluminescent detection using Hybridization Protection Assay and Dual Kinetic Assay technologies. |
Together, these technologies have allowed us to commercialize
new diagnostic tools that provide results in hours instead of
days or weeks. This has led to quicker time to result and
diagnosis, thereby making a difference in patient treatment and
outcome.
Targeting Ribosomal RNA. We have developed and patented a
technique that detects and identifies organisms by targeting
their rRNA. The major benefits in targeting rRNA include the
following:
| • | Each bacterial cell contains up to 10,000 copies of rRNA, as compared with only a few copies of DNA. Most NAT assays target DNA, which is present in only one or two copies in each target organism cell. Therefore, by using a probe that hybridizes to rRNA, the sensitivity of the test is increased thousands of times. This has allowed us to develop indirect and direct probe tests that are used with cultured samples or samples drawn directly from the patient. Because of our patented rRNA technology, we are the only company able to offer convenient and sensitive non-amplified NAT assays for the detection of non-viral microorganisms in the United States. | |
| • | The high number of rRNA targets also offers significant advantages when target-amplified assays are used. When very small numbers of organisms are present in a sample, they may not be present in the portion of the sample used for the assay, despite being present in the sample. This would result in a negative test result. By breaking open the organisms prior to sampling, the multiple copies of rRNA targets are dispersed throughout the sample volume and the likelihood of detecting them is increased many fold. Thus, the likelihood of obtaining a false negative result is significantly less than is the case when single-copy DNA is targeted. | |
| • | rRNA molecules naturally exist as single strands that can directly hybridize with our chemiluminescent labeled DNA probes. This is in contrast to most DNA targets, which exist as double strands that must be separated before a probe can bind. These separated DNA strands tend to hybridize to each other rather than to the DNA probe, thus limiting the amount of DNA probe that can bind and the overall sensitivity of the test. |
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| • | rRNA molecules are present in all bacteria, fungi and parasites. This gives us the ability to design diagnostic products for any emerging infectious disease caused by these pathogens. |
Target Capture/ Nucleic Acid Extraction Technology.
Detection of target organisms that are present in small numbers
in a large-volume clinical sample requires that target organisms
be concentrated to a detectable level. One way to accomplish
this is to isolate the particular nucleic acid of interest by
binding it to a solid support, which allows the support, with
the target bound to it, to be removed from the original sample.
We refer to such techniques as “target capture.”
We have developed target capture techniques to immobilize
nucleic acids on magnetic beads by the use of a “capture
probe” that attaches to the bead and to the target nucleic
acid. We use a magnetic separation device to concentrate the
target by drawing the magnetic beads to the sides of the sample
tube, while the remainder of the sample is washed away and
removed from the reaction tube. We use these techniques in
conjunction with our patented amplification methods in our
current generation of amplified assays. When used in conjunction
with our patented amplification methods, target capture
techniques concentrate the target organisms and also remove
materials in the sample that might otherwise interfere with
amplification.
Target capture offers the following benefits:
| • | Concentration of target organisms from large volume samples, without the need for centrifugation steps, | |
| • | Elimination of potential inhibitors of amplification, | |
| • | Increased ability to test a variety of clinical samples, including urine and blood, | |
| • | Capture of multiple targets by using capture probes that hybridize to one or more specific nucleic acid sequences, and | |
| • | Enhanced specificity through selective capture of target and removal of contaminants that may produce a false positive signal. |
Transcription-Mediated Amplification. The goal of
amplification technologies is to produce millions of copies of
the target nucleic acids that are present in samples in small
numbers, which can then be detected using DNA probes.
Amplification technologies can yield results in only a few hours
versus the several days or weeks required for traditional
culture methods.
Some amplification-based NAT assays for routine clinical
laboratory use a technology known as Polymerase Chain Reaction,
or PCR, to amplify DNA. With additional steps, PCR also can be
used to amplify RNA. Since most organisms contain only one or
two copies of DNA, there are fewer target molecules to initiate
amplification when DNA targets are used, and sometimes
amplification does not begin at all. In such cases, assays using
PCR can fail to produce results. PCR also uses repeated heating
and cooling steps requiring complex and expensive thermocyclers.
Because PCR produces large amounts of DNA, which is a stable
molecule, there is an increased risk of cross-contamination from
one PCR assay to another, potentially leading to a high number
of false positive results.
Our patented TMA technology is designed to overcome the many
problems faced with other target amplification methods such as
PCR. TMA is a transcription-based amplification system that uses
two different enzymes to drive the process. The first enzyme is
a reverse transcriptase that creates a double-stranded DNA copy
from an RNA or DNA template. The second enzyme, an RNA
polymerase, makes thousands of copies of the complementary RNA
sequence, known as the “RNA amplicon,” from the
double-stranded DNA template. Each RNA amplicon serves as a new
target for the reverse transcriptase and the process repeats
automatically, resulting in an exponential amplification of the
original target that produces over a billion copies of amplicon
in less than 30 minutes.
TMA offers the following benefits:
| • | The TMA process takes place in one tube at one temperature without the need of expensive thermocyclers required by PCR. All reagents are added to the tube and nothing is removed. This |
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| makes the test simpler to use and suitable for automation, and it minimizes the possibility of carry-over contamination and false positive test results; | ||
| • | TMA is very robust and often can be used with clinical samples with little or no purification; | |
| • | The RNA nucleic acid that is synthesized in the TMA reaction is much more labile when outside the reaction tube and in the lab environment than the DNA that is produced in the PCR method. This reduces the possibility of carry-over contamination; | |
| • | TMA is able to amplify RNA and DNA targets, whereas PCR requires additional reagents and steps to amplify RNA; and | |
| • | TMA can be used in end-point chemiluminescent as well as “real time” qualitative and quantitative fluorescent assays. |
Chemiluminescent Technologies and Hybridization Protection
Assay. Our current DNA probes use chemiluminescent
acridinium esters, or AE molecules, that generate light as a
label for detection. The AE technology is much more sensitive
than fluorescence or absorbance techniques used by our
competitors. When AE-labeled DNA probes are mixed with chemical
activators, a light signal is produced. Many DNA probe assays
and immunoassays use enzyme or radioisotope labels. Assays that
use enzyme-labeled DNA probes are complex and can be inhibited
by contaminants present in the sample. Radioisotopes offer a
strong signal but are difficult to handle, difficult to dispose
of and dangerous because they give off harmful radiation.
We have simplified testing, further increased test sensitivity
and specificity and increased convenience with our patented
Hybridization Protection Assay, or HPA, technology. With HPA, we
introduced the first NAT assay that did not require the
cumbersome wash steps needed with conventional probe tests and
immunoassays. In the HPA process, the AE molecule is protected
within the double-stranded helix that is formed when the probe
binds to its specific target. Prior to activating the AE
molecule, known as “lighting off,” a chemical is added
that destroys the AE molecule on any unbound probes, leaving the
label on the bound probes unaffected. When the “light
off” reagent is added to the specimen tube, only the label
attached to the hybridized probe produces a signal indicating
the target organism’s DNA or RNA is present. All of these
steps occur in a single tube or microtiter plate and without any
wash steps.
Our Dual Kinetic Assay, or DKA, technology uses two types of AE
molecules — one that “flashes” and another
one that “glows.” By using DKA, we have created NAT
assays that can detect two separate targets simultaneously.
APTIMA Technology. We have combined target capture, TMA
and DKA together into an integrated family of technologies known
as APTIMA. APTIMA assays represent the latest generation of
nucleic acid amplification testing, simplifying sample handling,
minimizing contamination and allowing for the simultaneous
detection of two analytes in one tube. APTIMA assays offer
modern clinical laboratories the significant advantage of
carrying out all steps of the assay in a single tube. APTIMA
thereby increases assay performance, reduces laboratory costs
and improves laboratory efficiency. APTIMA technology combined
with automation such as the TIGRIS instrument supports true
walk-away automation, allowing hundreds of specimens to be
tested by an individual technician in a single run.
Our Products
We have applied our core technologies to develop multiple
product lines, all of which utilize our expertise in NAT probes,
sample collection and processing. We categorize our products
into clinical diagnostic products and blood screening products.
Clinical Diagnostic
Products.
Within our clinical diagnostic product group, we have developed
products for the detection of non-viral and viral microorganisms.
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Clinical Diagnostic Products for the Detection of Non-Viral
Microorganisms. We have developed FDA-approved amplified and
non-amplified NAT assays that detect non-viral microorganisms.
We have established a market-leading position in non-amplified
NAT assays, particularly with respect to assays for the
detection of chlamydia and gonorrhea, and we have obtained FDA
approval for an amplified STD test to compete in that market
segment. Our principal products for the detection of non-viral
microorganisms include our non-amplified AccuProbe and
non-amplified PACE family of products and our amplified
Mycobacterium Tuberculosis Direct Test and amplified APTIMA
Combo 2 product, as set forth below.
Clinical Diagnostic Products for the Detection of Non-Viral
Microorganisms
| FDA | Commercial | ||||||||||||
| Product Line | Principal Technologies | Target Microorganism | Clearance/Approval | Distribution | |||||||||
|
AccuProbe Culture Identification |
Non-amplified detection of rRNA from culture isolate by Hybridization Protection Assay |
Blastomyces dermatitidis Campylobacter Coccidioides immitis Enterococcus Histoplasma capsulatum Haemophilus influenzae Group B Streptococcus Group A Streptococcus Mycobacterium avium Complex Mycobacterium avium Mycobacterium gordonae Mycobacterium intracellulare Mycobacterium kansasii Mycobacterium tuberculosis Neisseria gonorrhoeae Streptococcus pneumoniae Staphylococcus aureus Listeria monocytogenes |
September 1990 November 1989 October 1990 November 1989 February 1990 March 1990 November 1989 November 1990 May 1990 August 1990 April 1990 August 1990 November 1990 April 1990 November 1989 August 1990 August 1990 June 1990 |
Gen-Probe — North America bioMérieux Rebio Gen and other distributors — Rest of World |
|||||||||
| GASDirect | Non-amplified detection of rRNA from a swab sample by Hybridization Protection Assay | Group A Streptococcus | March 1994 |
Gen-Probe — North America bioMérieux, Rebio Gen and other distributors — Rest of World |
|||||||||
|
PACE Product Family |
Non-amplified detection of rRNA from patient sample by Hybridization Protection Assay | Chlamydia trachomatis and Neisseria gonorrhoeae, including combined detection |
PACE — December 1987 PACE
2 — April 1992 PACE 2C — October 1994 |
Gen-Probe — North America bioMérieux, Rebio Gen and other distributors — Rest of World |
|||||||||
|
Mycobacterium Tuberculosis Direct Test (or MTD) |
Transcription- Mediated Amplification of rRNA in patient sample and detection by Hybridization Protection Assay |
Mycobacterium tuberculosis | December 1995 |
Gen-Probe — North America bioMérieux, Rebio Gen and other distributors — Rest of World |
|||||||||
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| FDA | Commercial | ||||||||||||
| Product Line | Principal Technologies | Target Microorganism | Clearance/Approval | Distribution | |||||||||
|
APTIMA Combo 2 |
Target Capture, Transcription-Mediated Amplification of rRNA and detection by Dual Kinetic Assay | Chlamydia trachomatis and Neisseria gonorrhoeae in swab specimens and urine samples from symptomatic and asymptomatic males and females | May 2001 |
Gen-Probe — North
America Europe Rebio Gen — Japan |
|||||||||
|
APTIMA CT ASR, APTIMA GC ASR APTIMA CT APTIMA GC |
Target Capture, Transcription-Mediated Amplification of rRNA and detection by Dual Kinetic Assay | Chlamydia trachomatis and Neisseria gonorrhoeae |
Not required December 2004 March 2005 |
Gen-Probe — U.S. Gen-Probe — U.S. |
|||||||||
AccuProbe Products. Our AccuProbe Culture Identification
products are powerful tools for the identification of
mycobacterial, fungal and bacterial pathogens, with
sensitivities and specificities approaching 100% in most cases.
These products allow for the detection of target organisms from
primary cultures, eliminating the additional labor of purifying
secondary cultures. All AccuProbe Culture Identification assays
are based on our HPA technology. All of our AccuProbe Culture
Identification tests follow a standard format, use common
reagents and do not require highly trained technical personnel.
Results are obtained utilizing our luminometers, which are easy
to use and offer precise readings. In addition, the convenient
packaging provides extended stability and shelf life. As part of
our AccuProbe Culture Identification product line, we also have
developed a procedure to detect Group B Streptococcus, or
GBS, from broth culture. The assay demonstrates near
100% sensitivity and specificity when testing broth samples
after 24 hours of incubation. Our products address the
market need for a more rapid, direct test procedure for GBS that
can be used to effectively screen women during pregnancy and to
provide prompt results when testing is performed just before
delivery.
Group A Streptococcus Direct. The Group A Streptococcus
Direct Test, or GASDirect, assay is a rapid NAT assay for the
direct detection of Streptococcus pyogenes in one hour
from a throat swab. Sensitivity and specificity are equivalent
to culture methods taking 72 hours to complete and are
higher than the rapid membrane antigen tests often used in
physician offices. The test provides fast and accurate results,
eliminates subjective interpretation by the laboratory
technician, and aids physicians in making more informed
treatment decisions. The product’s ease of use enables
efficient batch testing. An automatic pipetting option offers
greater workflow economies and laboratory productivity.
PACE Product Family. In 2004, our STD products
accounted for approximately 53% of the United States markets for
chlamydia and gonorrhea testing. Our NAT assays have proven to
be more sensitive and specific than traditional enzyme
immunoassay methods. The PACE 2 System currently is the
major clinical diagnostic product line we manufacture and sell.
Our PACE 2C is the first advanced NAT product to offer the
convenience of testing for both chlamydia infections and
gonorrhea from a single patient specimen. This feature
eliminates the need to collect separate specimens and the need
to transport the specimens under different conditions. The
PACE 2C continues to meet the needs of today’s
clinical laboratories that prefer a cost-effective,
non-amplified NAT assay for routine screening for chlamydia
infections and gonorrhea. Other products in the PACE 2
product line include individual tests to detect and confirm both
chlamydia infections and gonorrhea. The PACE product family also
includes the PACE Specimen Collection kits for endocervical and
urethral specimens. Sales of our PACE family of assays accounted
for 20% of our total revenues in 2004, 29% of our total revenues
in 2003 and 44% of our total revenues in 2002. The decrease in
the percentage of total revenues represented by our PACE family
of assays is attributable to two factors. First, our total
revenues are increasing primarily due to increases in our
blood-screening segment, which lowers the overall contribution
of the clinical diagnostic revenues as a percentage of total
revenues. Second, we are actively converting our PACE customers
over to our amplified APTIMA Combo 2 product line which,
while partially decreasing PACE family revenues, ultimately
contributes to total clinical diagnostic product sales growth.
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Mycobacterium Tuberculosis Direct Test. Amplification is
particularly important when detecting pathogens present at low
levels, as is often the case with tuberculosis. Culture tests
for TB can take six to eight weeks for a preliminary result,
often resulting in a patient not receiving appropriate treatment
on a timely basis or receiving unnecessary treatment. Our
amplified Mycobacterium Tuberculosis Direct, or MTD, test has
sensitivity similar to a culture test but can detect the TB
pathogen within a few hours. The test is performed directly on a
patient sample, and can be used to quickly differentiate between
TB and other mycobacteria, resulting in reduced isolation time
and treatment of an infected patient. Our amplified MTD assay
was initially approved by the FDA in December 1995. Additional
applications of the test were subsequently approved. Our MTD
assay was the first amplified NAT assay for obtaining same
day results from sputum samples.
APTIMA Combo 2. To meet market demand for amplified
STD assays, we have developed our APTIMA Combo 2
assay, which received FDA approval in May 2001 and was launched
commercially in August 2001. Acceptance of first generation
amplified tests was adversely affected by the complexity of the
methodology and the lack of a format adequate for use in the
average laboratory. APTIMA Combo 2, which uses second
generation amplification technologies, allows us to overcome
these barriers. The test offers superior performance and ease of
use, including its use of a piercable cap that eliminates the
need to uncap samples prior to testing and a sample transport
medium that preserves the integrity of the sample for weeks at
room temperature. We also believe it currently is the only
NAT assay that can be used to accurately screen urine
samples for chlamydia infections and gonorrhea with the same
sensitivity as seen from cervical and urethral samples.
We believe the assay is ideally suited to test specimens from
both symptomatic and asymptomatic individuals. Symptomatic
individuals typically have large amounts of the microorganism
present at the infection site, while patients who are
asymptomatic typically have much lower levels of the
microorganism present at the infection site. APTIMA Combo 2
has the sensitivity and specificity to detect chlamydia
infections and gonorrhea from both symptomatic and asymptomatic
individuals.
In addition to amplification technology, our APTIMA Combo 2
assay utilizes the latest versions of our core technologies,
including target capture, HPA and DKA. APTIMA Combo 2 will
qualitatively detect and differentiate rRNA from Chlamydia
trachomatis and Neisseria gonorrhoeae bacteria. This
continues the “one test, two results” advantage we
first provided with our PACE 2C non-amplified assay for
chlamydia infections and gonorrhea. We believe we are in a
unique position to provide both amplified and non-amplified
assays for these infections. This allows us to compete in all
segments of the STD testing market and to provide the
appropriate NAT solution to meet the needs of many
different customers.
Our APTIMA Combo 2 assay is the first clinical diagnostic
assay approved for use on the fully automated TIGRIS instrument.
Our APTIMA Combo 2 assay is also performed on our
semi-automated DTS instruments. In January 2004, we
received FDA approval for the APTIMA Vaginal Swab Specimen
Collection Kit, the first kit that enables patients to
self-collect vaginal swab specimens to be tested for
Chlamydia trachomatis and Neisseria gonorrhoeae
using the APTIMA Combo 2 assay.
We have completed clinical trials to evaluate APTIMA
Combo 2 to test for Chlamydia trachomatis and
Neisseria gonorrhoeae from Cytyc Corporation’s
liquid Pap transport media. The Pap test remains the most widely
used screening test in the United States for the early detection
of cervical cancer. Approximately 50 million Pap tests are
performed annually in the United States, 80% of which are
liquid-based. Testing for Chlamydia trachomatis and
Neisseria gonorrhoeae from the liquid Pap medium would
offer patients, physicians and laboratories convenient testing
for several diseases from one sample, and further differentiate
what we believe to be the superior performance of APTIMA
Combo 2 in the widest range of specimen types. We filed for
United States regulatory clearance of the Cytyc application in
2004. Additionally, we are currently evaluating initial clinical
data from the TriPath liquid Pap transport media.
APTIMA CT ASR, APTIMA GC ASR, APTIMA CT and
APTIMA GC. We also have developed individual analyte
specific reagents, or ASRs, to separately detect the presence of
Chlamydia trachomatis and Neisseria gonorrhoeae.
ASRs comprise a category of in vitro diagnostic reagents to
bridge the gap between research and assays that have received
FDA approval. The FDA has created a series of regulations
governing
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these reagents. ASRs use a collection of specific reagents that,
when combined with general purpose reagents, give clinical
diagnostic testing laboratories the ability to build diagnostic
tests often referred to as “home-brew” tests. ASRs
allow diagnostic companies to deliver reagents to the market
rapidly, as most ASRs are exempt from FDA submissions. Our
APTIMA CT assay was granted marketing clearance by the FDA
in December 2004 and our APTIMA GC assay was granted
marketing clearance by the FDA in March 2005.
Clinical Diagnostic Products for the Detection of Viral
Microorganisms. In 1996, we were selected by the National
Heart, Lung and Blood Institute of the National Institutes of
Health, or NIH, to develop reagents and instrumentation for the
blood donor screening market using our core technologies. Our
work under the NIH contract also launched us into development of
products for viral detection of viral microorganisms in the
clinical diagnostic market. We produce qualitative diagnostic
tests that can determine whether the virus is present, and
quantitative tests that can determine the amount of the virus.
Our viral diagnostic assays currently are run on our
semi-automated instruments incorporating components of our DTS
system. Our principal products for viral diagnostics include our
qualitative HCV Test and our ASR for quantitative HCV testing,
as set forth below.
Clinical Diagnostic Products for the Detection of Viral
Microorganisms
| Target | FDA | Commercial | |||||||||||
| Product Line | Principal Technologies | Microorganism | Clearance/Approval | Distribution | |||||||||
|
Qualitative HCV Assay |
Target Capture, Transcription-Mediated Amplification of viral RNA, detection by Dual Kinetic Assay | HCV | November 2002 | Bayer — Worldwide | |||||||||
|
ASR for Quantitative HCV Testing |
Target Capture, Transcription-Mediated Amplification of viral RNA, detection by Hybridization Protection Assay | HCV | Not required | Bayer — U.S. | |||||||||
Qualitative HCV Assay. We have developed an amplified
TMA assay for the qualitative detection of HCV based on the
same technology used in our FDA-approved Procleix HIV-1/
HCV assay for screening donated blood. In collaboration
with Bayer Corporation, we completed clinical trials in the
United States for this assay in February 2002, and in November
2002, we received pre-market approval from the FDA. Bayer
currently distributes this assay under the trademark VERSANT in
the United States and other international markets under our
collaboration agreement.
ASR for Quantitative HCV Testing. We also have developed,
through our collaboration with Bayer, an ASR to quantitatively
determine the amount of HCV present in a sample. Our ASR for
Quantitative HCV currently is provided by Bayer to Quest
Diagnostics Incorporated, a leading national diagnostics
company. If we determine that there is sufficient demand for
this test, we will consider the development of a FDA-approved
product in the future.
Blood Screening
Products.
In 1996, the National Heart, Lung and Blood Institute of the NIH
selected us to develop reagents and instrumentation for the
blood donor screening market based on our core technologies. We
completed our development of the NAT assays for HIV-1 and HCV
for blood screening contemplated by the NIH contract in February
2002 incorporating our core technologies of target capture, TMA
and DKA. Our principal blood screening products are set forth
below.
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Blood Screening Products
| FDA | Commercial | ||||||||||||
| Product Line | Principal Technologies | Target Microorganism(s) | Clearance/Approval | Distribution | |||||||||
|
Procleix HIV-1/ HCV Assay |
Target Capture, Transcription- Mediated Amplification of viral RNAs, detection by Dual Kinetic Assay | HIV-1 and HCV in donated blood | February 2002 | Chiron — Worldwide | |||||||||
|
Procleix Ultrio Assay |
Target Capture, Transcription- Mediated Amplification of viral RNAs, detection by Dual Kinetic Assay | HIV-1, HCV and HBV in donated blood | Not approved | Chiron — Europe | |||||||||
|
Procleix WNV Assay |
Target Capture, Transcription- Mediated Amplification of viral RNAs, detection by Dual Kinetic Assay | WNV in donated blood | Not approved | Chiron — U.S. under IND | |||||||||
In 1998, in collaboration with Chiron, we were selected by The
American Red Cross to provide it with an HIV-1/ HCV assay for
testing pooled blood samples under an IND filed with the FDA.
The Red Cross is the largest supplier of blood, plasma and
tissue products in the world. The Red Cross provides almost half
of the nation’s entire blood supply of 14 million units by
working with more than 4.5 million donors and 3,000
hospitals through its 38 region national network. The Gen-Probe/
Chiron collaboration subsequently entered into similar
arrangements with America’s Blood Centers and American
Independent Blood Centers. As a result of these and other
implementations, approximately 99% of the nation’s blood
supply is being screened with NAT and over 80% of this screening
is being done with the Gen-Probe/ Chiron Procleix HIV-1/ HCV
assay. The Procleix HIV-1/ HCV assays supplied under the IND
were delivered on a cost recovery basis.
Testing by these organizations under the IND started in June
1999 and pivotal clinical trials were completed in 2000. The
completion of these trials allowed us to submit a BLA to the FDA
for the Procleix HIV-1/ HCV assay, which the FDA-approved in
February 2002. As a result of FDA approval, Chiron began in the
second quarter of 2002 to sell the assay at commercial prices to
United States customers, which resulted in our recognizing
increased revenues. The Procleix HIV-1/ HCV assay has received
approval in the United States, some European countries, and in
Asia. Regulations adopted by the European Union, or EU, required
all imported in vitro diagnostic products, including our
existing blood screening assays, to be registered and receive
“CE” mark approval by December 7, 2003 or before
further distribution after that date. Products already in the
EU supply chain on that date were permitted to remain in
distribution for two additional years. We received CE mark
approval for our initial Procleix HIV-1/ HCV blood screening
assay in February 2003, for the Procleix Ultrio assay in January
2004, and for the TIGRIS instrument, used in conjunction with
the Procleix Ultrio assay, in December 2004.
As noted above, most blood collection centers currently screen
donated blood by taking samples from separate units and then
conducting a probe-based test on the pooled samples. The
Procleix system, which currently is performed on a version of
our DTS instrumentation, provides sufficient throughput for
screening pooled samples of donor blood. However, we believe
that the FDA will ultimately require testing of each unit of
blood individually. Testing each unit individually is currently
impractical without fully automated instrumentation.
Accordingly, we have invested in the development of the TIGRIS
instrument, which we believe will provide the automation
necessary to facilitate the adoption of individual donor testing.
In collaboration with Chiron, we have developed the Procleix
Ultrio assay for the simultaneous detection of HIV-1, HCV and
HBV, which we believe will further drive demand for our blood
screening products. In December 2003, we commenced clinical
trials of the Procleix Ultrio assay in the United States. The
test is distributed and marketed by Chiron. The Procleix Ultrio
assay is designed to detect the presence of all known HIV-1
groups and subtypes and HCV and HBV genotypes in human
plasma during the very early stages of
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infection, when those agents are present but cannot be detected
by immunodiagnostic tests. The HBV component of the assay
has the potential to reduce the window period between infection
and detection of HBV up to 42% over new generation surface
antigen tests. The Procleix Ultrio assay for use on our
semi-automated instrument for export received its CE mark
in January 2004. In January 2004, we commenced clinical trials
of the Procleix Ultrio assay in the United States on our TIGRIS
instrument. During the third quarter of 2004, we submitted a BLA
to the FDA to permit commercial sales of the Procleix Ultrio
assay in the United States. We intend to seek approval in the
United States to run the test on both the semi-automated
Procleix system and on the fully-automated TIGRIS instrument. In
December 2004, the TIGRIS instrument received a CE mark for
use with the previously CE marked Procleix Ultrio assay
enabling us to begin commercialization of the Procleix Ultrio
assay for use on the TIGRIS instrument in the European Union, as
well as in other parts of the world that accept the CE mark.
In June 2003, we announced that our WNV assay was available
for use by United States blood centers to begin clinical testing
of the virus in freshly donated human blood. The WNV assay
currently is being used to screen over 80% of the United States
blood supply. The test is being distributed by Chiron and is the
first such test to prospectively screen the United States blood
supply under an IND. The prospective protocol was accepted by
the FDA in May 2003. The development of the WNV assay was
partially funded by the National Heart, Lung and Blood Institute
of the NIH. We filed a BLA for the WNV assay with the FDA
in January 2005. As of December 31, 2004, the assay had
tested over 19 million donations and intercepted
approximately 1200 WNV-infected blood donations through ongoing
national screening under an IND. In addition, the TIGRIS
instrument was used by several blood centers in 2004 to screen
both individual donor and pooled blood donations for WNV under
an IND, the first such instance of IDT for a high volume NAT
test being performed on a fully automated instrument.
| Emerging Diagnostic Applications |
We believe that our NAT technology and our instrumentation
are well suited for numerous emerging applications. We developed
our first cancer-related product, a TMA-based assay for the
detection of chronic myelogenous leukemia, or CML, that has been
approved in Japan. We also entered into a license and
collaboration agreement with DiagnoCure to apply our
NAT technology in the detection of a new, highly specific
genetic market for prostate cancer. The successful transfer of
DiagnoCure’s first-generation technology for prostate
cancer detection to our APTIMA technology platform was completed
in the first half of 2004. We believe that the sensitivity and
specificity provided by our technologies will allow us to
develop additional products that can be used for detecting and
monitoring the expression of genes associated with cancer. In
addition, we have licensed 46 potential markers for
genitourinary and other cancers from Corixa, including a gene
called AMACR, that we believe is the second most promising
marker for a molecular-based prostate cancer diagnostic test. We
have also licensed innovative cell capture technology from
AdnaGen that may allow for enhancing the concentration of target
prostate cancer cells, thereby further increasing the
sensitivity and specificity of disease detection.
In the industrial market, we developed a NAT assay to detect the
bacterium Listeria monocytogenes from a cultured sample.
We received FDA approval for this product in June 1990.
Listeria is a food pathogen, and our assay is used by the
dairy industry in Europe to monitor for Listeria
contamination. We also developed a test for mycoplasma that
is used by tissue culture facilities in the industrial and
research markets to detect contamination of cell lines and
culture media. We are currently evaluating additional product
opportunities in the pharmaceutical manufacturing, personal care
product manufacturing, beverage, environmental, food and water
testing.
In addition, we are evaluating the feasibility of our technology
to detect genetic markers that might be useful as indicators of
a patient’s predisposition to some disease states and also
in the prediction of a patient’s responsiveness to a
particular therapy. We are also evaluating the market for
potential products in these areas.
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Instrumentation
We have developed and continue to develop instrumentation and
software that are designed specifically for performing our NAT
assays. We also provide technical support and instrument service
to maintain these systems in the field. Historically, we have
provided our instrumentation to laboratories and hospitals
without requiring them to purchase the equipment or enter into
an equipment lease. Instead, we recover the cost of providing
the instrumentation in the amounts we charge for our diagnostic
assays. We have begun to implement multi-year sales contracts
that have an equipment factor set forth in them. By placing our
proprietary instrumentation systems in laboratories and
hospitals, we can establish a platform for future sales of our
assays. We record the revenue associated with the delivery of
our proprietary integrated instrument platforms to customers in
product sales. The costs associated with the instrument are
charged to cost of sales on a straight-line basis over the
estimated life of the instrument, which ranges from three to
five years. The costs to maintain these systems in the field are
charged to cost of product sales as incurred. For instruments
that will be used for blood screening or in connection with our
clinical diagnostic collaboration with Bayer, we sell the
instrumentation to Chiron and Bayer, and they are responsible
for the placement, maintenance and repair of the units with
their laboratory and hospital customers.
| Luminometers |
We first introduced the LEADER series of luminometers, designed
in conjunction with MGM Instruments, Inc., for use with our PACE
and AccuProbe products and, more recently, the APTIMA product
line. Utilizing advanced chemiluminescent detection, our
luminometers provide high sensitivity, speed, accuracy and
ease-of-use. Currently, there is an installed base of over 4,000
of our luminometers worldwide. The LEADER series can accommodate
the throughput needs of low-volume testing laboratories. We have
no firm, long-term commitments from MGM Instruments to supply
products to us for any specific period, or in any specific
quantity, except as may be provided in a particular purchase
order. No FDA or foreign governmental approval is required to
sell our current LEADER series of luminometers in the clinical
diagnostic market.
| DTS 400, 800 and 1600 Instrument Systems |
Laboratories need nucleic acid testing solutions that are
accurate, efficient and economical. To meet this demand, we have
developed the family of DTS Systems. The DTS family of systems
uses direct tube sampling (DTS) technology consisting of an
exclusive penetrable cap on the sample collection tube to
minimize contamination and achieve safer, more convenient sample
removal. DTS simplifies sample transport, minimizes handling and
greatly reduces laboratory cross-contamination. These instrument
systems include the DTS 400, DTS 800 and
DTS 1600. This is a full line of automated solutions for
low, medium and high-volume laboratories to be used with our
latest generation of NAT assays, including the APTIMA Combo
2 assay. The instrument platforms can also be adapted to
perform the PACE family of assays, GASDirect Test, and AccuProbe
Group B Strep assay.
The DTS 400 instrument system is a fully-integrated modular
system that includes a magnetic particle separation and washing
system (target capture system), temperature controlled
incubators, a luminometer, software, on board bar code readers
and computers. The DTS 1600 system adds the additional
capabilities of an automated pipetting station and can process
up to 800 specimens per day, resulting in 1,600 chlamydia and
gonorrhea assay results per day for the APTIMA Combo 2
assay.
Chiron markets a version of the DTS 1600 system, which was
formerly known as eSAS, for use in blood screening under the
Procleix trademark. The version of the DTS system that Chiron
markets has received FDA approval and foreign governmental
approval in the countries where our blood screening products are
sold. Bayer markets systems comprised of components of the DTS
system for HCV clinical diagnostic assays. The systems that
Bayer markets do not require FDA or foreign governmental
approval.
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| TIGRIS DTS Instrument System |
We have developed the TIGRIS DTS instrument system, or TIGRIS
instrument, which we believe is the first high-throughput
instrument to completely automate NAT testing, for use in both
the clinical diagnostic and blood screening markets. The TIGRIS
instrument integrates and automates all of the steps associated
with our latest amplified NAT assays, including, sample
preparation, sample processing, amplification and detection. It
has the ability to process approximately 500 samples in an
eight-hour shift and up to 1,000 samples in approximately
13 hours.
The TIGRIS instrument is expected to reduce the time, labor
costs, risk of contamination and complexity associated with
performing NAT assays and blood screening. As demonstrated by
the Procleix WNV TIGRIS IND, the throughput of the TIGRIS
instrument is sufficient to allow high volume testing of
individual blood donations, rather than pooled donor samples. In
addition, we intend to develop additional NAT assays that can be
performed on the TIGRIS instrument. We believe the TIGRIS
instrument will be utilized in clinical diagnostic laboratories
and blood banks throughout the world. We capitalized
$25.1 million of costs incurred to develop TIGRIS software
after establishing technological feasibility. In 2004, we began
to amortize the capitalized software costs associated with the
TIGRIS instrument.
Clinical trials for clinical diagnostic testing on the TIGRIS
instrument using our APTIMA Combo 2 assay were completed in
June 2003 and a 510(k) premarket notification was filed with the
FDA in July 2003. In December 2003, we received approval from
the FDA for testing certain STDs on the TIGRIS instrument. In
the United States, the TIGRIS instrument is able to be used in
clinical diagnostic applications to perform NAT assays that have
been previously cleared by the FDA following clinical trials on
our existing instrumentation.
In December 2003, we filed an amended IND with the FDA to
initiate clinical trials of the Procleix Ultrio blood screening
assay on the TIGRIS instrument. We initiated clinical trials of
our Procleix Ultrio assay on the TIGRIS instrument for a blood
screening application in January 2004. We submitted a BLA for
the Procleix Ultrio assay to the FDA during the third quarter of
2004. We intend to seek approval in the United States to run the
test on both the semi-automated Procleix system and on the fully
automated TIGRIS instrument. The Procleix Ultrio assay received
its CE mark in January 2004 for use on our semi-automated
Procleix system. In October 2004, we submitted to European
regulators a design dossier amendment for use of the Procleix
Ultrio assay on the TIGRIS instrument. In December 2004, we
received a CE mark for the TIGRIS instrument for use with the
previously CE marked Procleix Ultrio assay, enabling us to begin
commercialization of the Procleix TIGRIS system in the European
Economic Area, as well as in other parts of the world that
accept the CE mark.
Marketing and Sales
We market our products for the clinical diagnostics market to
laboratories in the United States and Canada through our direct
sales force. As of January 31, 2005, our direct sales force
consisted of a staff of approximately 31 sales
representatives. We also support our sales efforts through a
staff of 18 field technical representatives. Our sales
representatives average over 15 years of selling
experience, with an average of six years focused on sales of NAT
products. Sales representatives principally focus on large
accounts including large reference laboratories, public health
laboratories and hospitals throughout the United States and
generally do not focus on physicians at this time. We
continually educate our sales representatives on the technical,
clinical and economic merits of our products. We use sales
meetings, technical on-line sales training and in-the-field
training to ensure our sales representatives are properly
informed about all areas of our product lines and selling
processes. Our blood screening products are marketed and
distributed by Chiron.
| Marketing Strategy |
The focus of our marketing strategy is to solidify awareness of
the superiority of our technology, illustrate the cost
effectiveness of this technology and continue to differentiate
our products from those of our competitors. We intend to
continue targeting our marketing efforts to various levels of
laboratory and hospital management through research
publications, print advertisements, conferences and the
Internet. We attend
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various national and regional conferences throughout the year.
Our web site is used for educating existing and potential
customers about our assays and contains our entire directory of
products, on-line technical materials and links to related
medical sites.
| Sales Strategy |
We concentrate our selling efforts on the management teams of
laboratories and hospitals. Our sales representatives are able
to recommend the appropriate business solution to meet the needs
of our customers by presenting multiple NAT technology and
instrumentation options. Sales representatives are trained to
find new market opportunities, provide diagnostic solutions to
address unmet customer needs, and to provide comprehensive
after-sale product support. In addition, our field technical
support group provides thorough training and ongoing technical
support for all of our NAT products.
Distribution
We have entered into an agreement with bioMérieux for
distribution of certain of our microbial non-viral diagnostic
products in Europe and various countries in Asia (other than
Japan), Australia, South America and Mexico. We have entered
into an agreement for distribution of our microbial non-viral
diagnostic products in Japan with Chugai Diagnostics Science,
which was acquired by Fujirebio in 2002. Fujirebio renamed the
company Rebio Gen, Inc. In other countries, we utilize
independent distributors with experience and expertise in
clinical diagnostic products.
The viral diagnostic products we manufacture under our
collaboration agreement with Bayer and the blood screening
products we manufacture under our collaboration agreement with
Chiron are marketed and distributed by those companies.
Customers
The primary customers for our clinical diagnostic products
include large reference laboratories, public health laboratories
and hospitals. Our blood screening collaboration with Chiron
accounted for 47% of our total revenues in the year ended
December 31, 2004 and 42% of our total revenues for the
year ended December 31, 2003. Our blood screening
collaboration with Chiron is largely dependent on two large
customers in the United States, The American Red Cross and
America’s Blood Centers, but we did not receive any
revenues directly from these entities. Chiron was our only
customer that accounted for greater than 10% of our total
revenues for the year ended December 31, 2004. In addition,
Quest Diagnostics, Laboratory Corporation of America Holdings
and various state and city public health agencies accounted for
an aggregate of 20% of our total revenues for the year ended
December 31, 2004 and 21% of our total revenues for the
year ended December 31, 2003. Although state and city
public health agencies are legally independent of each other,
they tend to act similarly with respect to their purchasing
decisions.
Corporate Collaborations and Strategic Arrangements
| Agreement with Chiron Corporation |
In June 1998, we entered into a strategic alliance with Chiron
to develop and market NAT-based products for the blood screening
and clinical diagnostic markets. Chiron subsequently assigned
the clinical diagnostics portion of the agreement to Bayer. The
Gen-Probe/ Chiron alliance initially developed and is
manufacturing and marketing the combination HIV-1/ HCV assay for
qualitative screening of blood and blood products under the
Procleix name. Additional blood screening assays, such as the
Procleix Ultrio assay and the WNV assay, have been developed
through the collaboration and are discussed elsewhere in this
document. In the event that any third-party technology is needed
to continue development under the collaboration agreement, costs
for obtaining such third-party technology will be allocated
among the parties.
Under the agreement, our share of revenues from the initial
Procleix HIV-1/ HCV assay ranged from 43% to 47.5% through 2003.
Effective January 1, 2004, we amended the agreement to
permanently fix our share at 45.75% of net revenues for assays
that include a test for HCV. For commercial assays that do not
test
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for HCV, such as the prospective West Nile test, the agreement
remains unchanged, with each party retaining 50% of the net
revenues after deduction of appropriate expenses. The amendment
also eliminates the possibility of Chiron appointing a third
party distributor in the United States to sell these products.
From inception through December 31, 2004, we recognized a
total of $318 million in revenue under this collaboration
agreement and have recorded $5.7 million in deferred
license revenues as of December 31, 2004.
The collaboration agreement has an initial term of 10 years
from the first commercial sale of blood screening assays, which
occurred in the first quarter of 2000. The agreement may be
extended by the development of new products under the agreement,
so that it will expire upon the later of the end of the initial
term or five years after the first commercial sale of the last
new product developed during the initial term. The agreement can
be terminated by a party earlier if the other party materially
breaches the agreement and does not cure the breach following
90 days’ notice or if the other party becomes
insolvent or declares bankruptcy.
All rights and title to inventions discovered under the
collaboration agreement belong to the party who developed the
invention, or to both parties, if both parties developed the
invention. However, if one party uses confidential information
relating to the core technology of the other party to develop an
invention that improves on, and whose use would infringe on, the
core technology of the other party, then the other party will
have the exclusive option to acquire all rights and title to the
invention on commercially reasonable terms, except in certain
situations where the invention will be jointly owned.
In January 2004, we began United States clinical trials of the
Procleix Ultrio assay on the TIGRIS instrument system,
triggering a $6.5 million contract milestone payment from
Chiron that we recorded during the three months ended
March 31, 2004. During January 2004, the Procleix Ultrio
assay, running on our semi-automated instrument system, received
its CE mark, which permitted Chiron to launch the product in the
European Union. In December 2004, use of the TIGRIS instrument
with the previously CE marked Procleix Ultrio assay received a
CE mark enabling the commercialization of the Procleix TIGRIS
system in the European Economic Area, as well as in other parts
of the world that accept the CE mark.
| Agreement with Bayer Corporation |
In 1998, following the execution of our agreement with Chiron,
Chiron assigned the clinical diagnostic portion of the agreement
to Bayer. Under the terms of our collaboration with Bayer, we
will develop, manufacture and market NAT assays for viral
targets and cancer markers in the clinical diagnostic market
with Bayer. Pursuant to the collaboration, we and Bayer
initially developed and are manufacturing and marketing
quantitative and qualitative assays for HCV. In the event that
any third-party technology is needed to continue development
under our collaboration agreement with Bayer, costs for
obtaining such third-party technology will be allocated among
the parties. In addition, either party has the right to
separately pursue obtaining rights to cancer markers necessary
for the development of NAT assays.
Under the terms of this agreement, Bayer agreed to pay us a
combination of transfer prices and royalties on product sales.
From inception through December 31, 2004, we recognized a
total of $10.6 million in revenue under our collaboration
agreement with Bayer, including $1.9 million in revenue
during the year ended December 31, 2004.
The collaboration agreement has an initial term of 10 years
from the first commercial sale of a clinical diagnostic assay
subject to the agreement, which occurred in the second quarter
of 2000. The agreement may be extended by the development of new
products under the agreement, so that it will expire upon the
later of the end of the initial term or five years after the
first commercial sale of the last new product developed during
the initial term. The agreement can be terminated earlier if a
party materially breaches the agreement and does not cure the
breach following 90 days’ notice from the
non-breaching party or if a party becomes insolvent or declares
bankruptcy.
All rights and title to inventions discovered under the
collaboration agreement belong to the party who developed the
invention, or to both parties, if both parties developed the
invention. However, if one party uses confidential information
relating to the core technology of the other party to develop an
invention that improves on, and whose use would infringe on, the
core technology of the other party, then the other party will
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have the exclusive option to acquire all rights and title to the
invention on commercially reasonable terms, except in certain
situations where the invention will be jointly owned.
In November 2002, we initiated an arbitration proceeding against
Bayer in connection with the clinical diagnostic collaboration.
Under the terms of the collaboration agreement, Bayer acquired
the exclusive right to distribute nucleic acid diagnostic tests
designed and developed by us for the detection of HIV, hepatitis
and other specified viruses, subject to certain conditions. In
the arbitration, we are seeking to prove that Bayer has failed
to fulfill the conditions required to maintain its exclusive
distribution rights. Accordingly, we are seeking confirmation
that the agreement grants us, in the present circumstances, a
co-exclusive right to directly distribute the viral diagnostic
tests that are the subject of the agreement. In November 2003,
Bayer filed a counterclaim for monetary damages based on alleged
delays in the development of the TIGRIS instrument and certain
assays, and other claims. The hearing on the matter began on
September 13, 2004 and closing arguments were completed on
November 3, 2004. The arbitrator agreed to review
additional written testimony following closing arguments, and
has informed the parties that he intends to issue a written
decision on or about March 25, 2005. There can be no
assurances as to the final outcome of the arbitration.
| National Institutes of Health Contracts |
In January 2000, we began work on a three-year
$13.4 million cost sharing contract with the NIH to modify
the Procleix HIV-1/ HCV assay to incorporate HBV detection
capability and make it simpler for organ donation centers to
test the blood of organ donors. Through December 31, 2002,
the NIH had reimbursed us $7.8 million of these costs or
100% of the cost-sharing portion for which they were
responsible. We and Chiron will share equally the remaining
costs to complete the project.
In October 2002, we received a $1.0 million contract
extension from the NIH to develop a NAT assay for the detection
of the West Nile virus. The NIH allocated an additional
$2.5 million to the contract extension in February 2003.
In November 2003, we received $4.3 million of supplemental
contract funding from the NIH. This contract extension supported
our pursuit of clinical studies and the submission on
January 27, 2005 of our BLA for our nucleic acid test for
the detection of WNV in donated human blood.
| Distribution Agreement with Rebio Gen |
In September 1998, we entered into a distribution agreement with
Chugai Diagnostics Science Co., Ltd., a subsidiary of our parent
corporation at that time, for the distribution of our non-viral
diagnostic products in Japan. During 2002, Chugai Pharmaceutical
sold Chugai Diagnostics Science Co., Ltd. to Fujirebio Inc., a
Japanese life sciences company, which re-named the company Rebio
Gen, Inc. From inception through December 31, 2004, we
recognized $18.2 million in sales revenue under this
distribution agreement, including $2.6 million in sales
revenue during the year ended December 31, 2004. The
distribution agreement with Rebio Gen terminates on
December 31, 2005. Prior to that date, this agreement may
be terminated by either party upon a material breach of this
agreement that is not cured following 60 days’ written
notice, unless the material breach relates to an obligation to
make payments under the agreement, in which case a 30 day
cure period applies. This agreement may also be terminated if a
party becomes insolvent or declares bankruptcy, ceases to be
actively engaged in business, or engages in or is charged with
unethical or illegal behavior that jeopardizes the reputation
and goodwill of either party.
Technology Licenses
| Licenses of Our Technology We Have Granted to Other Companies |
Agreements with bioMérieux. In May 1997, we entered
into collaborative research agreements with bioMérieux
Vitek, Inc., which created a worldwide relationship between
bioMérieux and us.
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In August 2000, we entered into amended agreements with
bioMérieux, Inc. that transitioned the relationship from a
collaborative arrangement to a royalty-bearing arrangement that
covered semi-automated probe assays and advanced
fully-automated, probe assays for the diagnosis of infectious
diseases and detection of food pathogens. In September 2004, we
entered into a termination agreement with bioMérieux, which
effectively terminated the 1997 collaborative research
agreements and the amended agreements that we entered into with
bioMérieux in August 2000. Pursuant to the terms of the
termination agreement, bioMérieux paid us an aggregate of
approximately $1.6 million to conclude certain outstanding
royalty and other obligations under the terminated agreements.
Further, we paid $1.0 million to bioMérieux to gain
access to bioMérieux’s intellectual property for
detecting genetic mutations that predispose people to blood
clotting disorders. Through December 31, 2004, we
recognized a total of $50.3 million in revenue under the
agreements, including $4.8 million during the year ended
December 31, 2004.
In September 2004, we also entered into non-exclusive licensing
agreements with bioMérieux and its affiliates that provide
bioMérieux and its affiliates options to access our
ribosomal RNA technologies for certain uses. We refer to these
agreements as the Easy Q agreement and the GeneXpert agreement.
Pursuant to the terms of these agreements, bioMérieux paid
us an aggregate of $250,000 for two limited non-exclusive,
non-transferable, without the right to grant sublicenses except
to affiliates, research licenses and two non-exclusive,
non-transferable options for licenses to develop diagnostic
products for certain disease targets using our patented
ribosomal RNA technologies. These options were exercised by
bioMérieux’s payment to us of $4.5 million in
January 2005. bioMérieux may also acquire rights to develop
products for additional targets, if any, by paying us up to an
additional $3.0 million, the exact total additional amount
based on the number of additional targets, if any, selected by
bioMérieux, by the end of 2006. Under each license, we will
receive royalties from bioMérieux on the net sale of any
products bioMérieux develops using our intellectual
property. If any option is exercised, the resulting license
agreement shall terminate upon the expiration of the last to
expire patent covered by the agreement. In the event of a change
in control with respect to bioMérieux, we have the right to
terminate these agreements, and the respective licenses granted
to bioMérieux thereunder, upon 60 days prior written
notice to bioMérieux delivered within six (6) months
of the date of such change in control. The respective
obligations of bioMérieux’s affiliates under the
agreements is guaranteed by bioMérieux SA, the parent
company of the bioMérieux affiliates that are parties to
the agreements. We will record revenue based on the total number
of targets eventually selected. Through December 31, 2004,
we have not recognized any revenue under these agreements.
License Agreement with Rebio Gen. In July 2001, we
entered into a license agreement with Chugai Diagnostics Science
Co., Ltd., a subsidiary of our parent corporation at that time.
As noted above, in September 2002, Chugai Diagnostics Science
Co., Ltd. was acquired by Fujirebio, which re-named the company
Rebio Gen, Inc. The license agreement has an initial term of
10 years, with automatic renewal for consecutive one year
terms unless one party gives the other party notice 90 days
prior to the end of the current term. Under the terms of this
agreement, we granted Chugai Diagnostics Science Co., Ltd. a
non-exclusive license for Japan in the field of human clinical
diagnostics to various of our proprietary technologies,
including TMA and HPA technology. All rights and title to any
discovery, invention or improvement made by Rebio Gen as a
result of access to our patent rights licensed under the
agreement belong solely to Rebio Gen. We received a license fee
and a royalty payment for sales made prior to the effective date
of the agreement and will receive royalty payments from any
products incorporating the licensed technology, including those
developed and commercialized by Rebio Gen, until the expiration
of our patents incorporated in these products, which is expected
to occur in December 2020. From inception through
December 31, 2004, we have recognized a total of
$2.8 million in revenue under this agreement, including
$0.3 million in revenue during the year ended
December 31, 2004. This agreement may be terminated by
either party upon breach of the agreement that is not cured
following 60 days’ written notice. We also received
rights to distribute outside of Japan products developed by
Rebio Gen under the license.
Non-Exclusive License with Becton Dickinson and Company.
In September 1995, we granted Becton Dickinson a non-exclusive
worldwide license to make, have made, use, sell and import
products that utilize rRNA for the diagnosis of vaginosis and
vaginitis in humans. Becton Dickinson paid us an up front
license fee and has agreed to pay us royalties for the life of
the licensed patents. From inception through December 31,
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2004, we have recognized a total of $3.4 million in revenue
under this agreement, including $0.7 million in revenue
during the year ended December 31, 2004. Becton
Dickinson’s obligations to make royalty payments under this
agreement terminate when the patents that are the subject of
this agreement expire, which is expected to occur in March of
2015. Becton Dickinson can terminate the agreement at any time
on 30-days prior written notice.
Cross Licensing Agreements with Tosoh. In December 2003,
we entered into agreements with Tosoh Corporation to
cross-license intellectual property covering certain NAT
technologies. The licenses, which were effective January 1,
2004, cover products in clinical diagnostics and other related
fields. Under the agreements, Tosoh received non-exclusive
rights to our proprietary TMA and rRNA technologies in exchange
for two payments to us totaling $7.0 million in 2004.
Additionally, Tosoh will pay us royalties on worldwide sales of
any products that employ our technologies licensed by Tosoh. We
will gain access, in exchange for royalty payments to Tosoh, to
Tosoh’s patented TRC amplification and INAF detection
technologies for use with our real time TMA. The agreements
terminate at various times commencing in July 2010 through the
expiration of the last to expire patents subject to the
agreements and may be terminated by a party upon material breach
of the agreement by the other party that is not cured following
60 days’ written notice. In 2004, we recognized a
total of $7.0 million in revenue under these agreements.
| Licenses We Have Obtained to Third-Party Technology that We Use in Our Products |
Co-Exclusive License from Stanford University. In August
1988, we obtained a license from Stanford University granting us
rights under specified patent applications covering nucleic acid
amplification methods related to TMA. This license was amended
in April 1997. Under the amended license agreement, we are the
co-exclusive worldwide licensee of the Stanford amplification
technology, with Organon Teknika as the only other permitted
Stanford licensee. We paid a license fee and are obligated to
make royalty payments to Stanford based on net sales of products
incorporating the licensed technology, subject to a minimum
annual royalty payment. From inception through December 31,
2004, we incurred a total of $2.8 million in expenses under
this agreement, including $1.2 million in expenses during
the year ended December 31, 2004. Our obligation to make
royalty payments under this agreement terminates when the
patents constituting the Stanford amplification technology
expire, which is expected to occur in July 2017. This agreement
may be terminated by Stanford upon a material breach of the
agreement by us that is not cured following 60 days’
written notice.
Non-Assertion Agreement with Organon Teknika B.V. In
February 1997, we entered into a non-assertion agreement with
Organon Teknika. Both parties possessed certain rights regarding
transcription-based amplification methods. The agreement allows
both parties to practice their respective amplification methods
with immunity from legal action from the other party for
actually or allegedly infringing each other’s patent
rights. The agreement terminates upon the expiration of the last
of the patent rights that are subject to the agreement, which is
expected to occur in February 2016. This agreement also may be
terminated by Organon Teknika upon a material breach of the
agreement by us that is not cured following 90 days’
written notice. In July 2001, Organon Teknika merged with
bioMérieux. We do not believe the merger will have a
material effect on the bioMérieux license or the Organon
Teknika non-assertion agreement.
License from University of Wales College of Medicine. Our
consolidated subsidiary, Molecular Light Technology Limited and
its subsidiaries, collectively referred to as MLT, have
exclusive rights, with rights to sublicense, under a license
from the University of Wales College of Medicine, or UWCM, to
patents covering chemiluminescence technology for use in NAT
assays. In 1986, we entered into an agreement with UWCM pursuant
to which we obtained an exclusive sublicense to the technology.
This technology is an important component of our products and is
used to reveal when a probe has bound to its target sequence. We
will own all improvements to the chemiluminescence technology
that we develop. Our agreement terminates upon the expiration of
the last of the patent rights that are subject to the agreement,
which is expected to occur in August 2007. We paid royalties to
UWCM totaling $2.2 million and $0.8 million for the
years ended December 31, 2004 and 2003, respectively. The
agreement with UWCM may also be terminated by either party upon
breach of the agreement that is not cured following specified
notice provision.
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Non-Exclusive License from Vysis, Inc. In June 1999, we
obtained a non-exclusive license from Vysis granting us rights
under certain patents covering methods which combine target
capture technology with certain nucleic acid amplification
methods. We paid a license fee and are obligated to make royalty
payments to Vysis based on sales of products incorporating the
licensed technology. From inception through December 31,
2004, we incurred a total of $9.2 million in expenses under
this agreement, including $3.5 million in 2004. The
agreement terminates upon the expiration of the last of the
patent rights that are subject to this agreement, which is
expected to occur in July 2015. This agreement may be terminated
by Vysis upon breach of the agreement by us that is not cured.
The agreement may be terminated by us on written notice to
Vysis. In December 2001, Vysis was acquired by Abbott
Laboratories, Inc., one of our principal competitors.
In December 1999, we initiated litigation in which we sought a
declaratory judgment that our products were not covered by the
Vysis patents that are the subject of the above license and that
the patents are invalid and unenforceable. The case was
submitted to trial by jury in May 2002, and the jury returned
alternative verdicts in favor of Gen-Probe, finding the subject
patents do not cover Gen-Probe’s products and that they are
invalid on the grounds of obviousness and lack of enablement.
Following post-trial motions, judgment was entered on
August 5, 2002 in our favor. Vysis appealed the judgment
and has obtained amended patent claims from the Patent and
Trademark Office. In October 2002, we filed a second lawsuit to
challenge the scope and validity of the reissued patent. On
March 5, 2004, the appeals court vacated the prior judgment
in our favor and directed the District Court to dismiss the
case, on the ground of lack of subject matter jurisdiction. In
September 2004, we entered into a settlement agreement and an
amendment to our non-exclusive license agreement with Vysis
under which we agreed to withdraw our patent litigation against
Vysis and agreed to pay Vysis an aggregate of
$22.5 million. This aggregate amount included
$20.5 million for a fully paid up license to eliminate all
future royalty obligations by us to Vysis under the Collins
patent covered by the license, and $2.0 million for a fully
paid-up, royalty-free license in additional fields under the
Collins patent. The license now covers current and future
products in the field of infectious diseases as well as
potential products in all other fields. Chiron reimbursed us
$5.5 million of the $20.5 million allocated to the
cost of the fully paid-up license for the current field,
commensurate with its obligation to reimburse us for a portion
of the royalties paid by us to Vysis on blood screening
products. During the fourth quarter of 2004, we began to
amortize our share of the payment to cost of goods sold over the
patent’s remaining economic life of 135 months.
Non-Exclusive License with the Public Health Research
Institute of The City of New York, Inc. In June 1997, we
entered into a royalty bearing non-exclusive license with the
Public Health Research Institute of The City of New York, or
PHRI, to utilize PHRI’s fluorescently labeled NAT
technology. Under this agreement, we have worldwide rights to
develop, use and market kits in the field of human
in vitro diagnostics and food testing. We paid a
license fee and agreed to make milestone payments and annual
license fee payments, and to pay royalties on the net sales
price of products incorporating the licensed technology, subject
to a minimum annual royalty fee and a reduction in the royalties
based on the quantity of sales. From inception through
December 31, 2004, we incurred a total of $1.6 million
in license fees and $0.1 million in milestone payments
under this agreement. We anticipate that we will pay up to an
additional $0.4 million in milestone payments over the
remaining term of the agreement. This agreement terminates upon
the expiration of the last of the patent rights that are subject
to this agreement, which is expected to occur in April 2017.
This agreement may be terminated by PHRI upon a material breach
of the agreement that is not cured following 30 days’
written notice, or by us for any reason following
30 days’ written notice.
Exclusive License with DiagnoCure. In November 2003, we
entered into a license and collaboration agreement with
DiagnoCure under which we agreed to develop in collaboration
with DiagnoCure, and we agreed to market, a test to detect a new
gene marker for prostate cancer. The diagnostic test is expected
to detect a recently described gene called PCA3(DD3) that has
been shown by studies to date to be over expressed in malignant
prostate tissue. Under the terms of the agreement, we paid
DiagnoCure an upfront fee of $3.0 million, and agreed to
pay future fees and contract development payments of up to
$7.5 million over the next three years. As of
December 31, 2004, approximately $5.7 million remained
to be paid to DiagnoCure pursuant to this obligation during the
remainder of its three year term. We received exclusive
worldwide distribution rights under the agreement to any
products for the diagnosis of prostate cancer resulting from the
agreement, and agreed to pay DiagnoCure royalties of 8% on
cumulative net product sales of up to
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$50.0 million, and royalties of 16% on cumulative net sales
above $50.0 million. This agreement expires, on a
country-by-country basis, on the expiration of our obligation to
pay royalties to DiagnoCure, which such obligation remains in
effect as long as the licensed products are covered by a valid
claim of the licensed patent rights. We may terminate the
agreement for any reason following 30 days’ written
notice to DiagnoCure, or following 30 days’ written
notice to DiagnoCure in the event a licensed product fails to
produce a certain level of results in any clinical trial.
Exclusive Option Agreement with Qualigen, Inc. In
November 2004, we entered into an agreement with Qualigen, Inc.
under which we have an exclusive option to develop and
commercialize a point-of-use NAT instrument based on
Qualigen’s FDA-approved FastPack immunoassay system. If
successfully developed, the portable instrument would use our
NAT technology to detect, at the point of sample collection, the
presence of harmful microorganisms, genetic mutations and other
markers of diseases. Under the terms of the agreement, we paid
Qualigen $1.0 million for an 18-month option to license, on
an exclusive worldwide basis, Qualigen’s technology to
develop NAT assays for the clinical diagnostics, blood screening
and industrial fields. During this period, we intend to evaluate
the feasibility of adapting Qualigen’s immunoassay platform
to perform NAT using our proprietary technologies. If we
exercise this option, we will purchase shares of Qualigen
preferred stock convertible into approximately 19.5% of
Qualigen’s then outstanding fully diluted common shares.
The cost of acquiring this equity interest varies between $5.9
and $7.0 million, depending on the timing of the option
exercise. In addition, we may pay Qualigen up to $3 million
in license fees based on development milestones, as well as
royalties on any eventual product sales.
Exclusive License from AdnaGen AG. In December 2004, we
entered into a license agreement with AdnaGen AG to license
technology for molecular diagnostic tests to detect prostate and
other cancers. Under the terms of the agreement, we paid AdnaGen
license fees of $1.0 million, and will pay
$0.8 million on the later of February 1, 2006 or upon
issuance to AdnaGen of a patent containing valid claims that
cover products licensed under the agreement. We also agreed to
pay AdnaGen up to three milestone payments totaling an
additional $2.25 million based on the occurrence of certain
clinical, regulatory and/or commercial events. Further, we
agreed to pay AdnaGen royalties on net sales of any products
developed using AdnaGen’s technology. Additionally, we were
granted options through June 30, 2006 to obtain exclusive
licenses to use AdnaGen’s technology in molecular
diagnostic tests for kidney, ovarian and cervical cancers. If we
exercise any of these options, we will pay AdnaGen
$0.3 million for the exclusive license to each additional
cancer product, as well as royalties on net sales of any of
these additional cancer products developed using AdnaGen’s
technology. In addition, we retain a three-year right of first
negotiation to negotiate with AdnaGen on exclusive rights to
molecular diagnostic tests for breast, colon and lung cancers in
the event that AdnaGen proposes to grant to any third party a
license to AdnaGen technology for use to detect any of these
cancers. The agreement will expire on the expiration of our
obligation to pay royalties to AdnaGen under the agreement,
which such obligation remains in effect as long as the licensed
products are covered by a valid claim of the licensed
technology. Gen-Probe may terminate the agreement in its sole
discretion upon 30 days prior written notice to AdnaGen,
provided Gen-Probe has made any outstanding payments required
under the agreement. Either party may terminate the agreement
for cause by written notice to the other party of an uncured
material breach by the other party or if the other party is
unable to pay its debts or enters into compulsory or voluntary
liquidation.
License Agreement with Corixa Corporation. In January
2005, we entered into a license agreement with Corixa
Corporation pursuant to which we received the right to develop
molecular diagnostic tests for 46 potential genetic markers
in the areas of prostate, ovarian, cervical, kidney, lung and
colon cancer. Pursuant to the terms of the agreement, we paid
Corixa an initial access license fee of $1.6 million and
agreed to pay an additional $3.2 million in two equal
access fees of $1.6 million on each of January 31,
2006 and January 31, 2007, unless we terminate the
agreement prior to those dates. Pursuant to the agreement, we
also agreed to pay Corixa milestone payments totaling an
additional $2.0 million on a product-by-product basis based
on the occurrence of certain, regulatory and/or commercial
events. We also agreed to pay Corixa additional milestone
payments and royalties on net sales of any products developed
using Corixa’s technology. The agreement will expire on the
expiration of our obligation to pay royalties to Corixa under
the agreement, which such obligation remains in effect as long
as the licensed products are covered by a valid claim of the
licensed patent rights. We may terminate the agreement in our
sole discretion upon 30 days prior written notice to
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Corixa, provided we have made any outstanding payments due under
the agreement. Either party may terminate the agreement for
cause by written notice to the other party of an uncured
material breach by the other party or if the other party is
unable to pay its debts or enters into compulsory or voluntary
liquidation.
Patents and Proprietary Rights
To establish and protect our proprietary technologies and
products, we rely on a combination of patent, copyright,
trademark and trade secrets laws, as well as confidentiality
provisions in our contracts.
We have implemented a patent strategy designed to maximize our
intellectual property rights. We have obtained and are currently
pursuing patent coverage in the United States and those foreign
countries that are home to the majority of our anticipated
customer base. We currently own or have rights to more than 390
issued United States and foreign patents. In addition, our
patent portfolio includes pending patent applications in the
United States and corresponding international and foreign
filings in major industrial nations.
United States utility patents issued from applications filed
prior to June 8, 1995 have a term of the longer of
20 years from the earliest priority date or 17 years
from issue. United States utility patents issued from
applications filed on or after June 8, 1995 have a term of
20 years from the earlier of the application filing date or
earlier claimed priority date of a regular application. 119 of
our United States patents issued from applications filed prior
to June 8, 1995. Our remaining 84 United States patents
issued from applications filed on or after June 8, 1995.
Two of our United States patents which issued from applications
filed on or after June 8, 1995 are design patents which
have a term of 14 years from the date of issue. Patents in
most foreign countries have a term of 20 years from the
date of filing of the patent application. Because the time from
filing to issuance of patent applications is often several
years, this process may result in a shortened period of patent
protection, which may adversely affect our ability to exclude
competitors from our markets. The last of our currently issued
patents will expire by September 28, 2021. Our continued
success will depend to a significant degree upon our ability to
develop proprietary products and technologies and to obtain
patent coverage for those products and technologies. We intend
to continue to file patent applications covering any novel and
newly developed products and technologies.
On January 9, 2004, our basic patents covering detection of
organisms using probes to ribosomal nucleic acid (the Kohne
patents) expired in countries outside North America. While we
have additional patents relating to ribosomal nucleic acid
detection that remain in effect outside North America, there can
be no assurance that these patents will provide sufficiently
broad protection to prevent competitors from selling products
based on ribosomal nucleic acid detection in markets outside
North America. In the United States, the last-to-expire of the
Kohne patents remains in effect until March 3, 2015.
We also rely in part on trade secret protection for our
intellectual property. We attempt to protect our trade secrets
by entering into confidentiality agreements with third parties,
employees and consultants. The source code for our proprietary
software is protected both as a trade secret and as copyrighted
work. Our employees also sign agreements requiring that they
assign to us their interests in inventions and original
expressions and any corresponding patents and copyrights arising
from their work for us. However, it is possible that these
agreements may be breached, invalidated or rendered
unenforceable, and if so, there may not be an adequate
corrective remedy available.
Competition
The medical diagnostics and biotechnology industries are subject
to intense competition. Our competitors in the United States and
abroad are numerous and include, among others, diagnostic,
health care, pharmaceutical and biotechnology companies. Our
major competitors in the market for NAT diagnostics include
F. Hoffmann-La Roche Ltd. and its subsidiary Roche
Molecular Diagnostics, Abbott Laboratories, Becton Dickinson and
Company, and bioMérieux S.A. All of these companies are
manufacturers of laboratory-based tests and instruments for the
NAT market, and we believe that all of these companies are
developing automated systems similar to our TIGRIS instrument.
We believe the primary competitive factors in the market for NAT
diagnostics are sensitivity, specificity, ease of use, potential
for automation, cost, proprietary position, regulatory approvals
and compliance and availability of appropriate reimbursement.
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Many of our competitors have substantially greater financial,
technical, research and other resources and larger, more
established marketing, sales, distribution and service
organizations than we do. Moreover, many of our competitors
offer broader product lines and have greater brand recognition
than we do, and offer price discounts as a competitive tactic.
In addition, there can be no assurance that competitors, many of
which have made substantial investments in competing
technologies, will not prevent, limit or interfere with our
ability to make, use or sell our products either in the United
States or in international markets.
In the markets for clinical diagnostic products, a number of
competitors, including F. Hoffmann-La Roche Ltd. and
its subsidiary Roche Molecular Diagnostics, Abbott Laboratories,
Becton Dickinson and bioMérieux, compete with us for
product sales, primarily on the basis of technology, quality,
reputation, accuracy, ease of use, price, reliability, the
timing of new product introductions and product line offerings.
In markets outside of the United States, other factors,
including local distribution systems, complex regulatory
environments and differing medical philosophies and product
preferences, influence competition as well. In the areas of NAT
diagnostics for STDs, Roche Molecular Systems, and Becton
Dickinson currently have FDA-approved tests for chlamydia
infections and gonorrhea utilizing amplification technology.
Although we believe that the APTIMA Combo 2 test has
commercial advantages over the competing tests from Roche
Molecular Systems and Becton Dickinson, these competitors and
potential competitors may be able to develop technologies that
are as effective as, or more effective, or easier to interpret
or less expensive than, those offered by us, which would render
our products uncompetitive or obsolete.
In the market for blood screening products, our primary
competitor is Roche Molecular Diagnostics, which received FDA
approval of its PCR-based NAT tests for blood screening in
December 2002. We also compete with assays developed internally
by blood collection centers and laboratories based on PCR
technology, an HCV antigen assay marketed by Ortho Clinical
Diagnostics, a subsidiary of Johnson & Johnson, and
immunoassay products from Abbott Laboratories. In the future,
our blood screening products may compete with viral inactivation
technologies and blood substitutes.
Chiron, with whom we have entered into an agreement for our
blood screening products, retains certain rights to grant
licenses of the patents related to HCV to third parties. Chiron
has granted a license to Roche Molecular Diagnostics in the
blood screening field and has granted licenses to other
companies in the clinical diagnostic field. To the extent that
Chiron grants additional licenses, further competition may be
created for sales of HCV assays and such licenses may affect the
prices that can be charged for our products.
Government Regulation
Our clinical diagnostic products generally are classified in the
United States as “devices” and are regulated by the
FDA’s Center for Devices and Radiological Health. Our blood
screening products generally are classified in the United States
as “biologics” and are regulated by the FDA’s
Center for Biologics Evaluation and Research. The FDA also has
the authority to revoke previously granted marketing
authorizations.
For us to market our clinical diagnostic product kits as medical
devices in the United States, we generally must first obtain
clearance from the FDA pursuant to Section 510(k) of the
Federal Food, Drug, and Cosmetic Act, or FFDCA. If we modify our
products that already have received FDA clearance, the FDA may
require us to submit a separate 510(k) or premarket approval
application, or PMA, for the modified product before we are
permitted to market it in the U.S. In addition, if we
develop products in the future that are not considered to be
substantially equivalent to a legally marketed device, we will
be required to obtain FDA approval by submitting a PMA.
By regulation, the FDA is required to respond to a 510(k) within
90 days of submission of the application. As a practical
matter, final clearance often takes longer. The FDA may require
further information, including additional clinical data, to make
a determination regarding substantial equivalence. If the FDA
determines that the device, or its intended use, is not
“substantially equivalent,” the device sponsor must
then fulfill much more rigorous premarketing requirements.
The PMA process is more demanding than the 510(k) premarket
notification process. A PMA application, which is intended to
demonstrate that the device is safe and effective, must be
supported by extensive data, including data from preclinical
studies, human clinical trials and existing research material,
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and must contain a full description of the device and its
components, a full description of the methods, facilities and
controls used for manufacturing, and proposed labeling. The FDA
has 180 days to review a filed PMA application, although
the review of an application more often occurs over a
significantly longer period of time, up to several years. In
approving a PMA application or clearing a 510(k) application,
the FDA also may require some form of post-market surveillance,
whereby the manufacturer follows certain patient groups for a
number of years and makes periodic reports to the FDA on the
clinical status of those patients when necessary to protect the
public health or to provide additional safety and effectiveness
data for the device.
When FDA approval of a clinical diagnostic device requires human
clinical trials, and if the device presents a “significant
risk” (as defined by the FDA) to human health, the device
sponsor is required to file an investigational device exemption,
or IDE, application with the FDA and obtain IDE approval prior
to commencing the human clinical trial. If the device is
considered a “non-significant” risk, IDE submission to
FDA is not required. Instead, only approval from the
Institutional Review Board overseeing the clinical trial is
required.
Clinical trials must be conducted in accordance with Good
Clinical Practice under protocols submitted to the FDA. Our
clinical department has comprehensive experience with clinical
trials of NAT products.
After the FDA permits a device to enter commercial distribution,
numerous regulatory requirements apply. These include:
| • | the Quality System Regulation, which requires manufacturers to follow elaborate design, testing, control, documentation and other quality assurance procedures during the manufacturing process, | |
| • | labeling regulations, | |
| • | the FDA’s general prohibition against promoting products for unapproved or “off-label” uses, and | |
| • | the Medical Device Reporting regulation, which requires that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to reoccur. |
Failure to comply with the applicable United States medical
device regulatory requirements could result in, among other
things, warning letters, fines, injunctions, civil penalties,
repairs, replacements, refunds, recalls or seizures of products,
total or partial suspension of production, the FDA’s
refusal to grant future premarket clearances or approvals,
withdrawals or suspensions of current product applications, and
criminal prosecution.
Our blood screening products also are subject to extensive pre-
and post-market regulation as biologics by the FDA, including
regulations that govern the testing, manufacturing, safety,
efficacy, labeling, storage, record keeping, advertising, and
promotion of the products under the FFDCA and the Public Health
Services Act, and by comparable agencies in most foreign
countries. The process required by the FDA before a biologic may
be marketed in the United States generally involves the
following:
| • | completion of preclinical laboratory testing, | |
| • | submission of an IND, which must become effective before biologic clinical trials may begin, and | |
| • | performance of adequate and well controlled human clinical trials to establish the safety and effectiveness of the proposed biologic’s intended use. |
The FDA requires approval of a BLA before a licensed biologic
may be legally marketed in the United States. Product approvals
may be withdrawn if compliance with regulatory standards is not
maintained or if problems occur following initial marketing.
With respect to patented products or technologies, delays
imposed by the governmental approval process may materially
reduce the period during which we will have exclusive rights to
exploit them.
Our clinical trial programs for blood screening products were
developed in conjunction with our primary end users, The
American Red Cross, America’s Blood Centers and American
Independent Blood Centers. Pivotal clinical trials of the
Procleix HIV-1/HCV assay were completed in 2000, and our BLA was
approved in February 2002. Clinical trials of the Procleix
Ultrio assay were completed in 2004 with submission of a BLA in
the third quarter of 2004.
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The results of product development and human studies are
submitted to the FDA as part of the BLA. The BLA also must
contain extensive manufacturing information. The FDA may approve
or disapprove a BLA if applicable FDA regulatory criteria are
not satisfied or it may require additional clinical data. Once
approved, the FDA may withdraw the product approval if
compliance with post-market regulatory standards is not
maintained or if problems occur after the product reaches the
marketplace. In addition, the FDA may require post-marketing
studies to monitor the effect of approved products, and may
limit further marketing of the product based on the results of
these post-market studies. The FDA has broad post-market
regulatory and enforcement powers, including the ability to levy
fines and civil penalties, suspend or delay issuance of
approvals, seize or recall products and withdraw approvals.
Satisfaction of FDA pre-market approval requirements for
biologics typically takes several years and the actual time
required may vary substantially based upon the type, complexity
and novelty of the product or disease. Government regulation may
delay or prevent marketing of potential products for a
considerable period of time and impose costly procedures upon
our activities. Success in early stage clinical trials does not
assure success in later stage clinical trials. Data obtained
from clinical activities is not always conclusive and may be
susceptible to varying interpretations that could delay, limit
or prevent regulatory approval. Even if a product receives
regulatory approval, later discovery of previously unknown
problems with a product may result in restrictions on the
product or even complete withdrawal of the product from the
market.
With respect to post-market product advertising and promotion,
the FDA imposes a number of complex regulations on entities that
advertise and promote biologics, which include, among others,
standards and regulations for direct-to-consumer advertising,
off-label promotion, industry sponsored scientific and
educational activities, and promotional activities involving the
Internet. The FDA has broad enforcement authority under the
FFDCA, and failure to abide by applicable FDA regulations can
result in penalties including the issuance of a warning letter
directing the entity to correct deviations from FDA standards, a
requirement that future advertising and promotional materials be
pre-cleared by the FDA, and state and federal civil and criminal
investigations and prosecutions.
We and all of our contract manufacturers are subject to periodic
inspection by the FDA and other authorities where applicable,
and are required to comply with the applicable FDA current Good
Manufacturing Practice regulations. Good Manufacturing Practice
regulations include requirements relating to quality control and
quality assurance, as well as the corresponding maintenance of
records and documentation, and provide for manufacturing
facilities to be inspected by the FDA. Manufacturers of
biologics also must comply with the FDA’s general
biological product standards. Failure to comply with the
statutory and regulatory requirements would subject the
manufacturer to possible legal or regulatory action, such as
suspension of manufacturing, seizure of product or voluntary
recall of a product. Adverse experiences with the product must
be reported to the FDA and could result in the imposition of
market restriction through labeling changes or in product
removal. Product approvals may be withdrawn if compliance with
regulatory requirements is not maintained or if problems
concerning safety or efficacy of the product occur following
approval.
Outside the United States, our ability to market our products is
contingent upon receiving marketing authorization from the
appropriate regulatory authorities. The requirements governing
the conduct of clinical trials, marketing authorization, pricing
and reimbursement vary widely from country to country. At
present, we apply for foreign marketing authorizations at a
national level, although within the European Union registration
procedures are now in effect under the IVD directive to
companies wishing to market a product in more than one European
union member state. We have taken the necessary actions to
register our products for sale into the European Economic
Community following a new requirement which became effective in
December 2004.
We are also subject to various state and local laws and
regulations in the United States relating to laboratory
practices and the protection of the environment. In each of
these areas, as above, regulatory agencies have broad regulatory
and enforcement powers, including the ability to levy fines and
civil and criminal penalties, suspend or delay issuance of
approvals, seize or recall products, and withdraw approvals, any
one or more of which could have a material adverse effect upon
us. In addition, in the course of our business, we handle, store
and dispose of chemicals. The environmental laws and regulations
applicable to our
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operations include provisions that regulate the discharge of
materials in the environment. Usually these environmental laws
and regulations impose “strict liability,” rendering a
person liable without regard to negligence or fault on the part
of, or conditions caused by, others. We have not been required
to expend material amounts in connection with our efforts to
comply with environment requirements. Because the requirements
imposed by these laws and regulations frequently change, we are
unable to predict the cost of compliance with these requirements
in the future, or the effect of these laws on our capital
expenditures, results of operations or competitive positions.
Manufacturing and Raw Materials
We have two state-of-the-art manufacturing facilities. Our
manufacturing facility in San Diego, California is
dedicated to producing our clinical diagnostic products and
provides us with highly flexible and cost effective
manufacturing capabilities. In 1999, we completed a
manufacturing facility located in Rancho Bernardo, California
for the manufacture of our blood screening products. This
facility meets the strict standards set by the FDA’s Center
for Biologics Evaluation and Research for the production of
blood screening products. We built this facility with the
capability to expand its operations to include production of
additional assays for the blood screening market and organ
transplant testing market. This facility has the capacity to
produce sufficient tests to satisfy current global demand for
these blood screening assays. We believe that our existing
manufacturing facilities provide us with capacity to meet the
needs of our currently anticipated growth.
We store our finished products at our warehouses in our
manufacturing facilities. Some of our products must be stored in
industrial refrigeration or freezer units which are on site. We
ship our products under ambient, refrigerated or frozen
conditions, as necessary, through third-party service providers.
We rely on one contract manufacturer for the production of each
of our instrument product lines. For example, KMC Systems is our
only manufacturer of the TIGRIS instrument, and MGM Instruments
is the only manufacturer of our LEADER series of luminometers.
We have no firm long-term commitments from KMC Systems, MGM
Instruments or any of our other manufacturers to supply products
to us for any specific period, or in any specific quantity,
except as may be provided in a particular purchase order.
We use a diverse and broad range of raw materials in the design,
development and manufacturing of our products. Although we
produce some of our materials on site at our manufacturing
facilities, we purchase most of the materials and components
used in manufacturing our products from external suppliers. In
addition, we purchase many key raw materials from single source
suppliers. For example, our current supplier of key raw
materials for our amplified NAT assays, pursuant to a
fixed-price contract, is the Roche Molecular Biochemicals
Division of Roche Diagnostics GmbH, an affiliate of Roche
Molecular Diagnostics, which is one of our primary competitors.
In addition, we have entered into a supply agreement with
F. Hoffmann-La Roche Ltd. and its affiliate Roche
Molecular Systems, Inc. for the manufacture and supply of DNA
probes for HPV. We work closely with our suppliers to assure
continuity of supply while maintaining high quality and
reliability. Although we generally consider and identify
alternative suppliers, we do not typically pursue alternative
sources due to the strength of our existing supplier
relationships.
Quality Systems
We have implemented modern quality systems and concepts
throughout the organization. Our regulatory, quality and
government affairs department supervises our quality systems and
is responsible for assuring compliance with all applicable
regulations, standards and internal policies. Our senior
management team is actively involved in setting quality
policies, managing internal regulatory matters and monitoring
external quality performance.
Our regulatory, quality and government affairs department has
successfully led us through multiple quality and compliance
audits by the FDA, foreign governments and customers. This
department also coordinated an audit by The British Standards
Institute, leading to our initial ISO 9001 certification.
We have subsequently employed TUV North America for
ISO 9001, EN 46001, EN 13485 and Diagnostic
“CE” marking activities.
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Research and Development
As of January 31, 2005, we had 249 full-time and
temporary employees in research and development. Our research
and development expenses were $68.5 million in 2004,
$63.6 million in 2003 and $47.0 million in 2002.
Employees
As of January 31, 2005, we had 809 full-time
employees, of whom 175 hold advanced degrees, 225 were in
research and development, 99 were in regulatory, clinical and
quality systems, 135 were in sales and marketing, 124 were in
general and administrative and 226 were in operations. None of
our employees is covered by a collective bargaining agreement,
and we consider our relationship with our employees to be good.
In addition, as of January 31, 2005 we had
101 temporary employees.
Factors That May Affect Future Performance
| 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 and
the initiation or termination of corporate collaboration
agreements. A significant portion of our costs also can vary
substantially between quarterly or annual reporting periods. For
example, the total amount of research and development costs in a
period often depends on the amount of research and development
costs we incur in connection with manufacturing developmental
lots and clinical trial lots. We incurred substantial costs of
manufacturing these lots in 2004 and will continue to incur
expense in 2005 and beyond. Moreover, a variety of factors may
affect our ability to make accurate forecasts regarding our
operating results. For example, our blood screening products and
some of our clinical diagnostic products, such as APTIMA
Combo 2, have a relatively limited sales history, which
limits our ability to project future sales accurately. Our share
of revenue under our blood screening collaboration with Chiron,
from commercial sales of assays that test for HCV, decreased to
45.75% of net revenues as of January 1, 2004, as a result
of the amendment to our collaboration agreement with Chiron. In
addition, we base our internal projections of our international
sales on projections prepared by our distributors of these
products, therefore we are dependent upon the accuracy of those
projections. Because of all of these factors, our operating
results in one or more future quarters may fail to meet or
exceed financial guidance we may provide from time to time and
the expectations of securities analysts or investors, which
could cause our stock price to decline.
| We are dependent on Chiron and other third parties for the distribution of some of our products. If any of our distributors terminates its relationship with us or fails to adequately perform, our product sales will suffer. |
We rely on Chiron to distribute our blood screening products and
Bayer to distribute some of our viral clinical diagnostic
products. Commercial product sales by Chiron accounted for 35%
of our total revenues for 2004 and 37% of our total revenues for
2003. Our agreements with Chiron and Bayer will terminate in
2010 unless extended. Both the Chiron and Bayer agreements can
be extended by the development of new products under the
agreements, in which case they will expire upon the later of the
end of the original term or five years after the first
commercial sale of the last new product developed during the
original term.
In February 2001, we commenced an arbitration proceeding against
Chiron in connection with our blood screening collaboration. The
arbitration related primarily to the propriety of various
deductions from gross revenues made by Chiron prior to
calculating Gen-Probe’s share of revenues and the
parties’ respective shares of revenues received from The
American Red Cross prior to FDA approval of the Procleix
HIV-1/HCV blood screening assay. Other disputed items included
the parties’ respective obligations in connection with
clinical trials of the Procleix HIV-1/HCV blood screening assay
and future assays, Chiron’s obligation to purchase blood
screening assays in compliance with its forecasts and the
parties’ respective obligations with respect to
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royalties to be paid on a patent license from a third party. By
December 2001, we negotiated a resolution to most of the
disputed items, and in January 2002, we received
$6.9 million in partial settlement of the claims. In the
event that we or Chiron commence arbitration against each other
in the future under the collaboration agreement, proceedings
could delay or decrease our receipt of revenue from Chiron or
otherwise disrupt our collaboration with Chiron, which could
cause our revenues to decrease and our stock price to decline.
In November 2002, we initiated an arbitration proceeding against
Bayer in connection with our clinical diagnostic collaboration.
Under the terms of the collaboration agreement, Bayer acquired
the exclusive right to distribute nucleic acid diagnostic tests
designed and developed by us for the detection of HIV, hepatitis
virus and other specified viruses, subject to specific
conditions. Our demand for arbitration stated that Bayer has
failed to fulfill the conditions required to maintain exclusive
distribution rights. Accordingly, we are seeking confirmation
that the agreement grants us, in the present circumstances, a
co-exclusive right to directly distribute the viral diagnostic
tests that are the subject of the agreement. In November 2003,
Bayer filed a counterclaim for money damages based on alleged
delays in the development of the TIGRIS instrument, alleged
delays in the development of certain assays, and other claims.
Bayer Healthcare LLC has also been added as a respondent and
counterclaimant. The hearing on the matter began on
September 13, 2004 and closing arguments were completed on
November 3, 2004. The arbitrator agreed to review
additional written testimony following closing arguments, and
has informed the parties that he intends to issue a written
decision on or about March 25, 2005. There can be no
assurances as to the final outcome of the arbitration or when it
may occur.
We rely upon bioMérieux for distribution of some of our
products in most of Europe, Rebio Gen, Inc. for distribution of
some of our products in Japan and various independent
distributors for distribution of our products in other regions.
Our distribution agreement with bioMérieux terminates on
May 1, 2006, although it may terminate earlier under
certain circumstances. The distribution rights revert back to
Gen-Probe upon termination. Our distribution agreement with
Rebio Gen, terminates on December 31, 2005.
If any of our distribution or marketing agreements is
terminated, particularly our agreement with Chiron, and we are
unable to renew or enter into an alternative agreement or if we
elect to distribute new products directly, we would have to
invest in additional sales and marketing resources, including
additional field sales personnel, which would significantly
increase future selling, general and administrative expenses. We
may not be able to enter into new distribution or marketing
agreements on satisfactory terms, or at all. If we fail to enter
into acceptable distribution or marketing agreements or fail to
market successfully our products, our product sales would
decrease.
| If we cannot maintain our current corporate collaborations and enter into new corporate collaborations, our product development could be delayed. In particular, any failure by us to maintain our collaboration with Chiron with respect to blood screening would have a material adverse effect on our business. |
We rely, to a significant extent, on our corporate collaborators
for the joint development and marketing of our products. If any
of our corporate collaborators were to breach or terminate its
agreement with us or otherwise fail to conduct their
collaborative activities successfully and in a timely manner,
the pre-clinical or clinical development or commercialization
and subsequent marketing of the products contemplated by the
collaboration could be delayed or terminated. We cannot control
the amount and timing of resources our corporate collaborators
devote to our programs or potential products. In addition, we
expect to rely on our corporate collaborators for the
commercialization of some of our products.
The continuation of any of our collaboration agreements may
depend on periodic renewal by us and our collaborators of our
corporate collaborations. Our agreements with Chiron and Bayer
will terminate in 2010 unless extended by the development of new
products under the agreements, in which case they will expire
upon the later of the original term or five years after the
first commercial sale of the last new product developed during
the original term. Both collaboration agreements are also
subject to termination prior to expiration upon a material
breach by either party to the agreement.
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If any of our collaboration agreements is terminated, or if we
are unable to renew those collaborations on acceptable terms, we
would be required to devote additional internal resources to
product development or marketing or to terminate some
development programs or seek alternative corporate
collaborations. We may not be able to negotiate additional
corporate collaborations on acceptable terms, if at all, and
these collaborations may not be successful.
| If our TIGRIS instrument reliability does not meet market expectations, we may be unable to retain our existing customers and attract new customers. |
Complex diagnostic instruments such as our TIGRIS instrument
usually require operating and reliability improvements following
their initial introduction. We believe that our experience with
our TIGRIS instrument, now in its early introduction stage, is
consistent with the general experience for comparable diagnostic
instruments. We have initiated an in-service reliability
improvement program for our TIGRIS instrument and a number of
improvements already have been installed at customers’
sites. If the continuous improvement program does not result in
improved instrument reliability, we could incur greater than
anticipated service expenses and market acceptance of the
instrument could be adversely affected. Additionally, failure to
resolve reliability issues as they develop could materially
damage our reputation and prevent us from retaining our existing
customers and attracting new customers.
| We face intense competition, and our failure to compete effectively could decrease our revenues and harm our profitability and results of operations. |
The clinical diagnostics industry is highly competitive.
Currently, the majority of diagnostic tests used by physicians
and other health care providers are performed by large reference
laboratories, public health laboratories and hospitals. We
expect that these laboratories will compete vigorously to
maintain their dominance in the diagnostic testing market. In
order to achieve market acceptance of our products, we will be
required to demonstrate that our products provide accurate,
cost-effective and time saving alternatives to tests performed
by traditional laboratory procedures and products made by our
competitors.
In the markets for clinical diagnostic products, a number of
competitors, including F. Hoffmann-La Roche Ltd. and its
subsidiary, Roche Molecular Diagnostics, Inc., Abbott
Laboratories, Becton Dickinson and Company and bioMérieux
S.A., compete with us for product sales, primarily on the basis
of technology, quality, reputation, accuracy, ease of use,
price, reliability, the timing of new product introductions and
product line offerings. In markets outside of the United States,
other factors, including local distribution systems, complex
regulatory environments and differing medical philosophies and
product preferences, influence competition as well. Some of our
competitors have, and in the future these and other competitors
may have, significantly greater financial, marketing, sales,
manufacturing, distribution and technological resources than us.
Moreover, these companies may have substantially greater
expertise in conducting clinical trials and research and
development, greater ability to obtain necessary intellectual
property licenses and greater brand recognition than we do. In
addition, we have licensed some of our proprietary technology
relating to certain clinical diagnostic and food pathogen
applications for use on specific instruments to bioMérieux,
and we may license other technologies to potential competitors
in the future. As a result, we may in the future compete with
bioMérieux and these other licensees for sales of products
incorporating our technology. Our competitors may be in a
stronger position to respond quickly to new or emerging
technologies, may be able to undertake more extensive marketing
campaigns, may adopt more aggressive pricing policies and may be
more successful in attracting potential customers, employees and
strategic partners than we are. We believe that our competitors
are developing “real time” or kinetic nucleic acid
assays and are developing semi-automated instrument systems to
perform real time assays. Our competitors may be further in the
development process than we are with respect to such assays and
instrumentation.
In the market for blood screening products, our primary
competitor is Roche Molecular Systems, which received FDA
approval of its Polymerase Chain Reaction, or PCR, based NAT
tests for blood screening in December 2002. We also compete with
assays developed internally by blood banks and laboratories
based on PCR technology, an HCV antigen assay marketed by Ortho
Clinical Diagnostics, a subsidiary of Johnson &
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Johnson, and immunoassay products from Abbott Laboratories. In
the future, our blood screening products also may compete with
viral inactivation technologies and blood substitutes.
Chiron, with whom we have a collaboration agreement for our
blood screening products, retains certain rights to grant
licenses of the patents related to HCV and HIV to third parties
in blood screening. Chiron has granted HIV and HCV licenses to
Roche Molecular Systems in the blood screening and clinical
diagnostics fields. Chiron has granted HIV and HCV licenses in
the clinical diagnostic field to Bayer Healthcare LLC, which
also has the right to grant certain additional HIV and HCV
sublicenses in the field to third parties. Chiron has granted an
HCV license to Abbott and an HIV license to Organon Teknika (now
bioMérieux). To the extent that Chiron grants additional
licenses in blood screening or Bayer grants additional licenses
in clinical diagnostics, further competition will be created for
sales of HCV and HIV assays and these licenses could affect the
prices that can be charged for our products.
| Our profit margin on the sale of blood screening assays may decrease upon the implementation of individual donor testing. |
We currently receive revenues from the sale of the Procleix
HIV-1/ HCV blood screening assay for use with pooled donor
samples. In pooled testing, multiple donor samples are initially
screened by a single test, however, Chiron sells our Procleix
HIV-1/ HCV assay to blood collection centers on a per donation
basis. We expect the blood screening market ultimately to
transition from pooled testing to individual donor testing. A
greater number of tests will be required for individual donor
testing than are now required for pooled testing. Under our
collaboration agreement with Chiron, we bear the cost of
manufacturing our Procleix HIV-1/ HCV assay. The greater number
of tests required for individual donor testing will increase our
variable manufacturing costs, including costs of raw materials
and labor. If the price per donor or total sales volume does not
increase in line with the increase in our total variable
manufacturing costs, our gross profit margins from sales of the
blood screening assay may decrease upon the adoption of
individual donor testing. We are not able to predict accurately
the extent to which our gross profit margin may be negatively
affected as a result of individual donor testing, because we do
not know the ultimate selling price that Chiron would charge to
the end user if individual donor testing were implemented.
| Because we depend on a small number of customers for a significant portion of our total revenues, the loss of any of these customers or any cancellation or delay of a large purchase by any of these customers could significantly reduce our revenues. |
Historically, a limited number of customers has accounted for a
significant portion of our total revenues, and we do not have
any long-term commitments with these customers other than our
collaboration agreement with Chiron. Our blood screening
collaboration with Chiron accounted for 47% of our total
revenues for 2004 and 42% of our total revenues for 2003. Our
blood screening collaboration with Chiron is largely dependent
on two large customers in the United States, The American Red
Cross and America’s Blood Centers, although we did not
receive any revenues directly from those entities. Chiron was
our only customer that accounted for greater than 10% of our
total revenues for the year ended December 31, 2004. In
addition, Quest Diagnostics Incorporated, Laboratory Corporation
of America Holdings and various state and city public health
agencies accounted for an aggregate of 20% of our total revenues
for 2004 and 21% of our total revenues for 2003. Although state
and city public health agencies are legally independent of each
other, they tend to act similarly with respect to their product
purchasing decisions. We anticipate that our operating results
will continue to depend to a significant extent upon revenues
from a small number of customers. The loss of any of our key
customers, or a significant reduction in sales to those
customers, could significantly reduce our revenues.
| Intellectual property rights on which we rely to protect the technologies underlying our products may be inadequate to prevent third parties from using our technologies or developing competing products. |
Our success will depend in part on our ability to obtain patent
protection for, or maintain the secrecy of, our proprietary
products, processes and other technologies for development of
blood screening and clinical diagnostic products and
instruments. Although we have 202 United States patents and 188
foreign patents, these patents, or any patents that we may own
or license in the future, may not afford meaningful protection
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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 September 28, 2021, 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. Moreover, the laws of some
foreign countries may not protect our proprietary rights to the
same extent as do the laws of the United States. Any patents
issued to us or our strategic partners may not provide us with
any competitive advantages, and the patents held by other
parties may limit our freedom to conduct our business or use our
technologies. Our efforts to enforce and maintain our
intellectual property rights may not be successful and may
result in substantial costs and diversion of management time.
Even if our rights are valid, enforceable and broad in scope,
competitors may develop products based on technology that is not
covered by our patents.
In addition to patent protection, we also rely on copyright and
trademark protection, trade secrets, know-how, continuing
technological innovation and licensing opportunities. In an
effort to maintain the confidentiality and ownership of our
trade secrets and proprietary information, we require our
employees, consultants, advisors and others to whom we disclose
confidential information to execute confidentiality and
proprietary information agreements. However, it is possible that
these agreements may be breached, invalidated or rendered
unenforceable, and if so, there may not be an adequate
corrective remedy available. Furthermore, like many companies in
our industry, we may from time to time hire scientific personnel
formerly employed by other companies involved in one or more
areas similar to the activities we conduct. In some situations,
our confidentiality and proprietary information agreements may
conflict with, or be subject to, the rights of third parties
with whom our employees, consultants or advisors have prior
employment or consulting relationships. Although we require our
employees and consultants to maintain the confidentiality of all
confidential information of previous employers, we or these
individuals may be subject to allegations of trade secret
misappropriation or other similar claims as a result of their
prior affiliations. Finally, others may independently develop
substantially equivalent proprietary information and techniques,
or otherwise gain access to our trade secrets. Our failure to
protect our proprietary information and techniques may inhibit
or limit our ability to exclude certain competitors from the
market and execute our business strategies.
| The diagnostic products industry has a history of patent and other intellectual property litigation, and we may 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. Because we produce and provide many
different products and services in this industry, we have faced
in the past, are currently facing, and may face in the future,
patent infringement suits by companies that control patents for
products and services similar to ours or other suits alleging
infringement of their intellectual property rights. In order to
protect or enforce our intellectual property rights, we may have
to initiate legal proceedings against third parties. Legal
proceedings relating to intellectual property typically are
expensive, take significant time and divert management’s
attention from other business concerns. The cost of this
litigation could adversely affect our results of operations,
making us less profitable. Further, if we do not prevail in an
infringement lawsuit brought against us, we might have to pay
substantial damages, including treble damages, and we could be
required to stop the infringing activity or obtain a license to
use the patented technology.
Recently, we have been involved in a number of patent disputes
with third parties, a number of which remain unresolved. For
example, we are in litigation with Enzo Biochem Inc. which
claims that genetic sequences used in certain of our gonorrhea
testing products infringe one of its patents.
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| 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, we would have to pay any amount
awarded by a court in excess of our policy limits. Our insurance
policies have various exclusions, and thus we may be subject to
a product liability claim for which we have no insurance
coverage, in which case, we may have to pay the entire amount of
any award. In addition, insurance varies in cost and can be
difficult to obtain, and we may not be able to obtain insurance
in the future on terms acceptable to us, or at all. A successful
product liability claim brought against us in excess of our
insurance coverage, may require us to pay substantial amounts,
which could harm our business and results of operations.
| We are exposed to risks associated with acquisitions and other long-lived and intangible assets that may become impaired and result in an impairment charge. |
As of December 31, 2004, we had approximately
$150.6 million of long-lived assets, including
$23.5 million of capitalized software relating to our
TIGRIS instrument, goodwill of $18.6 million and
$24.2 million of capitalized license fees, patents and
purchased intangibles that have been included in “Other
assets” on the face of the balance sheet. Additionally, we
had $35.7 million of land and building, $5.5 million
of leasehold improvements, $8.8 million of construction
in-progress and $26.7 of equipment and furniture and fixtures.
The carrying amounts of long-lived and intangible assets are
affected whenever events or changes in circumstances indicate
that the carrying amount of any asset may not be recoverable.
Such events or changes might include a significant decline in
market share, a significant decline in profits, rapid changes in
technology, significant litigation or other matters. Adverse
events or changes in circumstances may affect the estimated
undiscounted future operating cash flows expected to be derived
from long-lived and intangible assets. If at any time we
determine that an impairment has occurred, we will be required
to reflect the impaired value as a charge, resulting in a
reduction in earnings in the quarter such impairment is
identified and a corresponding reduction in our net asset value.
A material reduction in earnings resulting from such a charge
could cause us to fail to be profitable in the period in which
the charge is taken or otherwise to fail to meet the
expectations of investors and securities analysts, which could
cause the price of our stock to decline.
| Our future success will depend in part upon our ability to enhance existing products and to develop and introduce new products. |
The market for our products is 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, such as our NAT assay to detect WNV. For example, we
believe that we will need to continue to provide new products
that can detect a greater number of organisms from a single
sample. We also believe that we must develop new assays that can
be performed on automated instrument platforms, such as our
TIGRIS instrument.
The development of new or enhanced products is a complex and
uncertain process requiring the accurate anticipation of
technological and market trends, as well as precise
technological execution. In addition, the successful development
of new products will depend on the development of new
technologies. We will 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. Regulatory
clearance or approval of any new products may not be granted by
the FDA or foreign regulatory authorities on a timely basis, or
at all, and the new products may not be successfully
commercialized.
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| We expect to continue to incur significant research and development expenses, which may make it difficult for us to maintain profitability. |
In recent years, we have incurred significant costs in
connection with the development of our blood screening products
and our TIGRIS instrument. We expect our expense levels to
remain high in connection with our research and development as
we continue to expand our product offerings and continue to
develop products and technologies in collaboration with our
strategic partners. As a result, we will need to continue to
generate significant revenues to maintain profitability.
Although we expect our research and development expenses as a
percentage of revenue to decrease in future periods, we may not
be able to generate revenues and may not maintain profitability
in the future. Our failure to maintain profitability in the
future would cause the market price of our common stock to
decline.
| We may not have financing for future capital requirements, which may prevent us from addressing gaps in our product offerings or improving our technology. |
Although historically our cash flow from operations has been
sufficient to satisfy working capital, capital expenditure and
research and development requirements, in the future we may need
to incur additional debt or issue equity in order to fund these
requirements as well as to make acquisitions and other
investments. If we cannot obtain additional debt or equity
financing on acceptable terms or are limited with respect to
incurring additional debt or issuing equity, we may be unable to
address gaps in our product offerings or improve our technology,
particularly through strategic acquisitions or investments.
We may need to raise substantial amounts of money to fund a
variety of future activities integral to the development of our
business, including but not limited to the following:
| • | for research and development to successfully develop our new technologies and products, | |
| • | to conduct clinical trials, | |
| • | to obtain regulatory approval for new products, | |
| • | to file and prosecute patent applications and defend and assert patents to protect our technologies, | |
| • | to manufacture additional products ourselves or through third parties, | |
| • | to market different products to different markets, either through building our own sales and distribution capabilities or relying on third parties, and | |
| • | to acquire new technologies, products or companies. |
If we raise funds through the issuance of debt or equity,
including without limitation through the issuance of equity or
debt securities pursuant to our Form S-3 shelf registration
statement that we filed on August 29, 2003 with the
Securities and Exchange Commission relating to the possible
future sale of up to an aggregate of $150 million of debt
or equity securities, any debt securities or preferred stock
issued will have rights, preferences and privileges senior to
those of holders of our common stock in the event of a
liquidation and may contain other provisions that adversely
effect the rights of the holders of our common stock. The terms
of the 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 dilute your
ownership interest in us.
We expect to fund future acquisitions in part by issuing
additional equity. If the price of our equity is unacceptably
low or volatile due to market volatility or other factors, we
may not be able to acquire other companies.
| We have only one third-party manufacturer for each of our instrument product lines, which exposes us to increased risks associated with delivery schedules, manufacturing capability, quality assurance, quality and costs. |
We have one third-party manufacturer for each of our instrument
product lines. KMC Systems is our only manufacturer of our
TIGRIS instrument. MGM Instruments, Inc. is the only
manufacturer of our
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LEADER series of luminometers. We are dependent on these
third-party manufacturers, and this dependence exposes us to
increased risks associated with delivery schedules,
manufacturing capability, quality control, quality assurance and
costs. We have no firm long-term commitments from KMC Systems,
MGM Instruments or any of our other manufacturers to supply
products to us for any specific period, or in any specific
quantity, except as may be provided in a particular purchase
order. If KMC Systems, MGM Instruments or any of our other
third-party manufacturers experiences delays, disruptions,
capacity constraints or quality control problems in its
manufacturing operations or becomes insolvent, then product
shipments to our customers could be delayed, which would
decrease our revenues and harm our competitive position and
reputation.
Further, our business would be harmed if we fail to manage
effectively the manufacturing of our products. Because we place
orders with our manufacturers based on our forecasts of expected
demand for our products, if we inaccurately forecast demand, we
may be unable to obtain adequate manufacturing capacity or
adequate quantities of components to meet our customers’
delivery requirements, or we may accumulate excess inventories.
We may in the future need to find new contract manufacturers to
increase our volumes or to reduce our costs. We may not be able
to find contract manufacturers that meet our needs, and even if
we do, qualifying a new contract manufacturer and commencing
volume production is expensive and time consuming. For example,
qualifying a new manufacturer of our TIGRIS instrument would
take approximately 12 months. If we are required or elect
to change contract manufacturers, we may lose revenues, and our
customer relationships may suffer.
| If we or our contract manufacturers are unable to manufacture our products in compliance with regulatory requirements, in sufficient quantities, on a timely basis and at acceptable costs, our ability to sell our products will be harmed. |
We must manufacture our products in compliance with regulatory
requirements, in sufficient quantities and on a timely basis,
while maintaining product quality and acceptable manufacturing
costs. Significant additional work will be required for
scaling-up manufacturing of each new product prior to
commercialization, and we may not successfully complete this
work. Manufacturing and quality control problems have arisen and
may arise as we attempt to scale-up our manufacturing of a new
product, and we may not achieve scale-up in a timely manner or
at a commercially reasonable cost, or at all. In addition,
although we expect some of our newer products and products under
development to share production attributes with our existing
products, production of these newer products may require the
development of new manufacturing technologies and expertise.
In addition, the amplified NAT tests that we are producing 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. 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 margins. In addition, new products that detect more than
one target organism will contain significantly more complex
reagents, which will increase the cost of our manufacturing
processes and quality control testing. We or other parties we
engage to help us may not be able to manufacture these products
at a cost or in quantities that would make these products
commercially viable. If we are unable to develop or contract for
manufacturing capabilities on acceptable terms for our products
under development, we will not be able to conduct pre-clinical
and clinical testing on these product candidates, which will
prevent or delay regulatory clearance or approval of these
product candidates and the initiation of new development
programs.
Our blood screening products must be manufactured in compliance
with guidelines set forth by the FDA’s Center for Biologics
Evaluation and Research, and our clinical diagnostic products
must be manufactured in compliance with the guidelines set forth
by the FDA’s Center for Devices and Radiological Health.
Maintaining compliance with more than one division of the FDA
adds complexity and cost to our overall manufacturing processes.
In addition, our manufacturing facilities and those of our
contract manufac-
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turers are subject to periodic regulatory inspections by the FDA
and other federal and state regulatory agencies, and these
facilities are subject to Quality System Regulations
requirements of the FDA. We or our contractors may fail to
satisfy these regulatory requirements in the future, and any
failure to do so may prevent us from selling our products.
| Our 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, product quality labeling, advertising, or
promotional activities, or if new information is obtained
concerning the safety of a product. A government-mandated
recall, or a voluntary recall by us, could divert managerial and
financial resources and harm our reputation with customers.
In the past, we have had four voluntary recalls. The first
product recall occurred in September 1999, when we responded to
customer complaints about an increase in the number of our
Mycobacterium Tuberculosis Direct, or MTD, assays demonstrating
lower amplification of some test specimens. The formulation
problem was identified and corrected. The second recall occurred
in February 2000 when we recalled our MTD product due to
decreased stability of a reagent in certain kit lots. The
problem was identified and rectified through a voluntary field
correction. The third recall occurred in July 2002 following the
discovery of an error in the Chiron Procleix System software
used with the Procleix HIV-1/ HCV blood screening assay and
instruments. A review of prior test results determined that the
defect did not cause any inaccurate results. The problem was
rectified in a subsequent software update, which was submitted
to and approved by the FDA. The fourth recall occurred in June
2004 as a result of a customer complaint about our MTD product
suggesting reduced stability of one of our reagents. The problem
was identified and corrected and customers were provided with
replacement reagent. Our products may be subject to additional
recalls in the future. Future recalls could be more difficult
and costly to correct and may harm our financial results and our
reputation.
| Our sales to international markets are subject to additional risks. |
Sales of our products outside the United States accounted for
15% of our total revenues for 2004 and 13% of our total revenues
for 2003. Sales by Chiron outside of the United States accounted
for 58% of our international revenues for both 2004 and 2003.
Chiron has responsibility for the international distribution of
our blood screening products, which includes sales in France,
Australia, Singapore, New Zealand, Italy and other countries.
Our sales in France and Japan that were not made through Chiron
accounted for 10% and 6%, respectively, of our international
sales for 2004 and 16% and 10%, respectively, for 2003.
We expect a significant portion of our sales growth, especially
with respect to our blood screening products, to come from
expansion in international markets. Accordingly, we encounter
risks inherent in international operations. Other than Canada,
our sales are currently denominated in United States dollars, if
the value of the United States dollar increases relative to
foreign currencies, our products could become less competitive
in international markets. Our international sales also may be
limited or disrupted by:
| • | the imposition of government controls, | |
| • | export license requirements, | |
| • | economic and political instability, | |
| • | price controls, | |
| • | trade restrictions and tariffs, | |
| • | differing local product preferences and product requirements, and | |
| • | changes in foreign medical reimbursement and coverage policies and programs. |
In addition, we may have difficulty introducing new products in
international markets. For example, we do not believe our blood
screening products will be widely adopted in Germany until we
are able to offer an assay that screens for HBV, HAV, and parvo
B19, as well as HIV-1 and HCV, or in Japan until we are able to
offer an
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assay that screens for HBV, HIV-1 and HCV. Whenever we seek to
enter a new international market, we will be dependent on the
marketing and sales efforts of our international distributors.
We believe that the international market for our products is
important, and therefore we seek patent protection for our
products in foreign countries where we feel such protection is
needed. Because of the differences in foreign patent and other
laws concerning proprietary rights, our products may not receive
the same degree of protection in foreign countries as they would
in the United States.
| If third-party payors do not reimburse our customers for the use of our products or reduce reimbursement levels, our ability to sell our products profitably will be harmed. |
We sell our products primarily to large reference laboratories,
public health laboratories and hospitals, substantially all of
which receive reimbursement for the health care services they
provide to their patients from third-party payors, such as
Medicare, Medicaid and other domestic and international
government programs, private insurance plans and managed care
programs. Most of these third-party payors may deny
reimbursement if they determine that a medical product was not
used in accordance with cost-effective treatment methods, as
determined by the third-party payor, or was used for an
unapproved indication. Third-party payors also may refuse to
reimburse for experimental procedures and devices.
Third-party payors’ reimbursement policies also may affect
sales of our products that screen for more than one pathogen at
the same time, such as our APTIMA Combo 2 product for
screening for the causative agents of chlamydial infections and
gonorrhea in the same sample. Third-party payors may choose to
reimburse our customers on a per test basis, rather than on the
basis of the number of results given by the test. This may
result in laboratories and hospitals electing to use separate
tests to screen for each disease so that they can receive
reimbursement for each test they conduct. In that event,
laboratories and hospitals likely would purchase separate tests
for each disease, rather than products that test for more than
one microorganism.
In addition, third-party payors are increasingly attempting to
contain health care costs by limiting both coverage and the
level of reimbursement for medical products and services. Levels
of reimbursement may decrease in the future, and future
legislation, regulation or reimbursement policies of third-party
payors may adversely affect the demand for and price levels of
our products. If our customers are not reimbursed for our
products, they may reduce or discontinue purchases of our
products, which would cause our revenues to decline.
| Disruptions in the supply of raw materials from our single source suppliers, including the Roche Molecular Biochemicals division of Roche Diagnostics GmbH, which is an affiliate of one of our primary competitors, could result in a significant disruption in sales and profitability. |
We purchase some key raw materials used in the manufacture of
our products from single-source suppliers. We may not be able to
obtain supplies from replacement suppliers on a timely or
cost-effective basis. For example, our current supplier of key
raw materials for our amplified NAT assays, pursuant to a
fixed-price contract, is the Roche Molecular Biochemicals
division of Roche Diagnostics GmbH, an affiliate of Roche
Molecular Systems, which is one of our primary competitors and
the purchaser of Boehringer-Mannheim GmbH, with whom we had
originally contracted for supplies. A reduction or stoppage in
supply while we seek a replacement supplier would limit our
ability to manufacture our products, which could result in a
significant reduction in sales and profitability. In addition,
an impurity or variation in a raw material, either unknown to us
or incompatible with our products, could significantly reduce
our ability to manufacture products. Our inventories may not be
adequate to meet our production needs during any prolonged
interruption of supply. We have products under development
which, if developed, may require us to enter into additional
supplier arrangements. We also have single source suppliers for
proposed future products. Failure to maintain existing supply
relationships or obtain suppliers for our future products, if
any, on commercially reasonable terms, would prevent us from
manufacturing our future products and limit our growth.
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| We are dependent on technologies we license, and if we fail to license new technologies and rights to particular nucleic acid sequences for targeted diseases in the future, we may be limited in our ability to develop new products. |
We are dependent on licenses from third parties for some of our
key technologies. For example, our patented
Transcription-Mediated Amplification technology is based on
technology we have licensed from Stanford University and the
chemiluminescence technology we use in our products is based on
technology licensed by our consolidated subsidiary, Molecular
Light Technology Limited, from the University of Wales College
of Medicine. If our license with respect to any of these
technologies is terminated for any reason, we will not be able
to sell products that incorporate the technology. In addition,
although our research staff seeks to discover particular nucleic
acid sequences for targeted diseases, 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. Likewise, our ability to design
products that target these diseases may be based on our ability
to obtain the necessary rights from third parties who make any
of these discoveries. In addition, there are a finite number of
diseases and conditions for which our NAT assays may be
economically viable. If we are unable to obtain access to new
technologies or the rights to particular sequences or markers
necessary for additional diagnostic products on commercially
reasonable terms, we may be limited in our ability to develop
new diagnostic products.
| If we fail to attract, hire and retain qualified personnel, we may not be able to design, develop, market or sell our products or successfully manage our business. |
Competition for top management personnel is intense and we may
not be able to recruit and retain the personnel we need. The
loss of any one of our management personnel, particularly Henry
L. Nordhoff, our Chairman, President and Chief Executive
Officer, or our inability to identify, attract, retain and
integrate additional qualified management personnel, could make
it difficult for us to manage our business successfully, attract
new customers, retain existing customers and pursue our
strategic objectives. Although we have employment agreements
with our executive officers, we may be unable to retain our
existing management. We do not maintain key person life
insurance for any of our executive officers.
Similarly, competition for skilled sales, marketing, research,
product development, engineering, and technical personnel is
intense and we may not be able to recruit and retain the
personnel we need. The loss of the services of any key sales,
marketing, research, product development, engineering, and
technical personnel, or our inability to hire new personnel with
the requisite skills, could restrict our ability to develop new
products or enhance existing products in a timely manner, sell
products to our customers or manage our business effectively.
We may not be able to hire or retain qualified personnel if we
are unable to offer competitive salaries and benefits, or if our
stock does not perform well.
| We may acquire other businesses or form joint ventures that could decrease our profitability, dilute your ownership of us, increase our debt or cause us to incur significant expense. |
As part of our business strategy, we intend to pursue
acquisitions of other complementary businesses and technology
licensing arrangements. We also intend to pursue strategic
alliances that leverage our core technology and industry
experience to expand our product offerings and geographic
presence. We have limited experience with respect to acquiring
other companies and with respect to the formation of
collaborations, strategic alliances and joint ventures. If we
make future acquisitions, we may not be able to integrate these
acquisitions successfully into our existing business and we
could assume unknown or contingent liabilities. Any future
acquisitions by us also could result in large and immediate
write-offs or the incurrence of debt and contingent liabilities,
any of which could harm our operating results. Integration of an
acquired company also may require management resources that
otherwise would be available for ongoing development of our
existing business. We may not identify or complete these
transactions in a timely manner, on a cost-effective basis, or
at all, and we may not realize the anticipated benefits of any
acquisition, technology license or strategic alliance.
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To finance any acquisitions, we may choose to issue shares of
our common stock as consideration, which would dilute your
interest in us. If the price of our equity is low or volatile,
we may not be able to acquire other companies. Alternatively, it
may be necessary for us to raise additional funds through public
or private financings. Additional funds may not be available on
terms that are favorable to us and, in the case of equity
financings, may result in dilution to our stockholders.
| We and our customers are subject to various governmental regulations, and we may incur significant expenses to comply with these regulations and develop products compatible with these regulations. |
The clinical diagnostic and blood screening products we design,
develop, manufacture and market are subject to rigorous
regulation by the FDA and numerous other federal, state and
foreign governmental authorities. The process of obtaining
regulatory approvals, particularly from the FDA and some foreign
governmental authorities, to market our products can be costly
and time consuming, and approvals might not be granted for
future products on a timely basis, if at all. For example, we
were prohibited from commercially marketing our blood screening
products in the United States until we obtained approval of our
Biologics License Application from the FDA’s Center for
Biologic Evaluation and Research. We generally are prohibited
from marketing our clinical diagnostic products in the United
States unless we obtain either 510(k) clearance or premarket
approval from the FDA. Delays in receipt of, or failure to
obtain, clearances or approvals for future products could result
in delayed, or no, realization of product revenues from new
products or in substantial additional costs which could decrease
our profitability.
In addition, we are required to continue to comply with
applicable FDA and other material regulatory requirements once
we have obtained clearance or approval for a product. These
requirements include, among other things, the Quality System
Regulation, labeling requirements, the FDA’s general
prohibition against promoting products for unapproved or
“off-label” uses and adverse event reporting
regulations. Failure to comply with applicable FDA product
regulatory requirements could result in, among other things,
warning letters, fines, injunctions, civil penalties, repairs,
replacements, refunds, recalls or seizures of products, total or
partial suspension of production, the FDA’s refusal to
grant future premarket clearances or approvals, withdrawals or
suspensions of current product applications and criminal
prosecution. Any of these actions, in combination or alone,
could prevent us from selling our products.
Outside the United States, our ability to market our products is
contingent upon receiving marketing authorization from the
appropriate regulatory authorities. The requirements governing
the conduct of clinical trials, marketing authorization, pricing
and reimbursement vary widely from country to country. At
present, we apply for foreign marketing authorizations at a
national level, although within the European Union, registration
procedures are available to companies wishing to market a
product in more than one European union member state. We are
currently taking action to have our products registered for sale
into the European Economic Community following a new requirement
that became effective in December 2004. Failure to receive, or
delays in the receipt of, relevant foreign qualifications could
prevent us from selling our products in foreign countries.
As both the FDA and foreign government regulators have become
increasingly stringent, we may be subject to more rigorous
regulation by governmental authorities in the future. Our
products and operations also are often subject to the rules of
industrial standards bodies, such as the International Standards
Organization. Complying with these rules and regulations could
cause us to incur significant additional expenses, which would
harm our operating results.
The use of our diagnostic products is also affected by the
Clinical Laboratory Improvement Amendments of 1988, or CLIA, and
related federal and state regulations which provide for
regulation of laboratory testing. CLIA is intended to ensure the
quality and reliability of clinical laboratories in the United
States by mandating specific standards in the areas of personnel
qualifications, administration, participation in proficiency
testing, patient test management, quality and inspections.
Current or future CLIA requirements or the promulgation of
additional regulations affecting laboratory testing may prevent
some clinical laboratories from using any or all of our
diagnostic products.
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| 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 all of our products in our two manufacturing
facilities located in San Diego, California. These
facilities and the manufacturing equipment we use to produce our
products would be costly to replace and could require
substantial lead time to repair or replace. The facilities may
be harmed by natural or man-made disasters, including, without
limitation, earthquakes and fires, and in the event they were
affected by a disaster, we would be forced to rely on
third-party manufacturers. In the event of a disaster, we may
lose customers and we may be unable to regain those customers
thereafter. Although we possess insurance for damage to our
property and the disruption of our business from casualties,
this insurance may not be sufficient to cover all of our
potential losses and may not continue to be available to us on
acceptable terms, or at all.
| If we use biological and hazardous materials in a manner that causes injury or violates laws, we may be liable for damages. |
Our research and development activities and our manufacturing
activities involve the controlled use of 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 such
contamination or injury. In addition, we are subject to federal,
state and local laws and regulations governing the use, storage,
handling and disposal of these materials and specified waste
products. The damages resulting from any accidental
contamination and the cost of compliance with environmental laws
and regulations could be significant.
| The anti-takeover provisions of our certificate of incorporation and by-laws, provisions of Delaware law and our rights plan could delay or prevent a change of control that you may favor. |
Provisions of our amended and restated certificate of
incorporation and amended and restated bylaws also may
discourage, delay or prevent a merger or other change of control
that stockholders may consider favorable or may impede the
ability of the holders of our common stock to change our
management. The provisions of our amended and restated
certificate of incorporation and amended and restated bylaws,
among other things:
| • | divide our board of directors into three classes, with members of each class to be elected for staggered three-year terms, | |
| • | limit the right of stockholders to remove directors, | |
| • | regulate how stockholders may present proposals or nominate directors for election at annual meetings of stockholders, and | |
| • | authorize our board of directors to issue preferred stock in one or more series, without stockholder approval. |
In addition, because we have not chosen to be exempt from
Section 203 of the Delaware General Corporation Law, this
provision could also delay or prevent a change of control that
you may favor. Section 203 provides that, subject to
limited exceptions, persons that acquire, or are affiliated with
a person that acquires, more than 15 percent of the
outstanding voting stock of a Delaware corporation shall not
engage in any business combination with that corporation,
including by merger, consolidation or acquisitions of additional
shares, for a three-year period following the date on which that
person or its affiliate crosses the 15 percent stock
ownership threshold.
We also adopted a rights plan that could discourage, delay or
prevent an acquisition of us under certain circumstances. The
rights plan provides for preferred stock purchase rights
attached to each share of our common stock, which will cause
substantial dilution to a person or group acquiring 15% or more
of our stock if the acquisition is not approved by our Board of
Directors.
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| We may not successfully integrate acquired businesses or technologies. |
In August 2003, we acquired a majority of the outstanding shares
of Molecular Light Technology Limited and its subsidiaries and
in the future, we may acquire additional businesses or
technologies, or enter into strategic transactions. Managing
these acquisitions and any future acquisitions will entail
numerous operational and financial risks, including:
| • | the inability to retain key employees of any acquired businesses or hire enough qualified personnel to staff any new or expanded operations; | |
| • | the impairment of relationships with key customers of acquired businesses due to changes in management and ownership of the acquired businesses; | |
| • | the exposure to federal, state, local and foreign tax liabilities in connection with any acquisition or the integration of any acquired businesses; | |
| • | the exposure to unknown liabilities; | |
| • | higher than expected acquisition and integration costs that would cause our quarterly and annual operating results to fluctuate; | |
| • | increased amortization expenses if an acquisition results in significant goodwill or other intangible assets; | |
| • | combining the operations and personnel of acquired businesses with our own, which would be difficult and costly; and | |
| • | integrating or completing the development and application of any acquired technologies, which would disrupt our business and divert our management’s time and attention. |
| If we do not effectively manage our growth, it could affect our ability to pursue opportunities and expand our business. |
Growth in our business has placed and may continue to place a
significant strain on our personnel, facilities, management
systems and resources. We will need to continue to improve our
operational and financial systems and managerial controls and
procedures and train and manage our workforce. We will have to
maintain close coordination among our various departments. If we
fail to effectively manage our growth and address the foregoing
concerns, it could adversely affect our ability to pursue
business opportunities and expand our business.
| Future changes in financial accounting standards or practices or existing taxation rules or practices may cause adverse unexpected revenue fluctuations and affect our reported results of operations. |
A change in accounting standards or practices or a change in
existing taxation rules or practices can have a significant
effect on our reported results and may even affect our reporting
of transactions completed before the change is effective. New
accounting pronouncements and taxation rules and varying
interpretations of accounting pronouncements and taxation
practice have occurred and may occur in the future. Changes to
existing rules or the questioning of current practices may
adversely affect our reported financial results or the way we
conduct our business. For example, in December 2004, the FASB
issued SFAS No. 123R, “Share-Based Payment.”
This statement eliminates the ability to account for stock-based
compensation using the intrinsic value method allowed under
APB 25 and requires such transactions to be recognized as
compensation expense in the statement of income based on the
fair values on the date of grant, with the compensation expense
recognized over the period in which an employee is required to
provide service in exchange for the stock award. This new
requirement will negatively impact our earnings. For example,
recording a charge for employee stock options under
SFAS No. 123, “Accounting for Stock-Based
Compensation,” would have reduced our net income by
$11.0 million and $3.1 million for fiscal 2004 and
2003, respectively.
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| 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 plan to complete the implementation of a
new general ledger information system and data warehouse to
replace our current systems over the next two years. As a part
of this effort, we are rationalizing various legacy systems and
upgrading existing hardware and software applications and
implementing new data management applications to administer our
business information. We may not be successful in implementing
the new system, and transitioning data and other aspects of the
process could be more expensive, time consuming and resource
intensive than planned. Any disruptions that may occur in the
implementation of this new system or any future systems could
increase our expenses and adversely affect our ability to report
in an accurate and timely manner the results of our consolidated
operations, our financial position and cash flow and to
otherwise operate our business, which could adversely affect our
financial results, stock price and reputation.
| Our forecasts and other forward looking statements are based upon various assumptions that are subject to significant uncertainties that may result in our failure to achieve our forecasted results. |
From time to time in press releases, conference calls and
otherwise, we may publish or make forecasts or other forward
looking statements regarding our future results, including
estimated earnings per share and other operating and financial
metrics. Our forecasts are based upon various assumptions that
are subject to significant uncertainties and any number of them
may prove incorrect. For example, our estimated earnings per
share are based in part upon a forecast of our weighted average
shares outstanding at the time of our estimate. Our achievement
of any forecasts depends upon numerous factors, many of which
are beyond our control. Consequently, our performance may not be
consistent with management forecasts. Variations from forecasts
and other forward looking statements may be material and adverse
and could adversely affect our stock price and reputation.
| Compliance with changing corporate governance and public disclosure regulations may result in additional expenses. |
Changing laws, regulations and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley
Act of 2002, new SEC regulations and Nasdaq Stock Market
rules, are creating uncertainty for companies such as ours. To
maintain high standards of corporate governance and public
disclosure, we intend to invest all reasonably necessary
resources to comply with evolving standards. These investments
have resulted in increased general and administrative expenses
and a diversion of management time and attention from
revenue-generating activities.
| Item 2. | Properties |
Our worldwide headquarters are located in a
262,000 square-foot facility located in San Diego,
California. We currently own this facility, the land on which it
sits and an adjacent 22-acre parcel. We are currently building a
291,000 square-foot facility on our adjacent 22-acre parcel
to support our company-wide growth. Approximately
100,000 square feet of the new facility will be left vacant
for future expansion and primarily will be used for research and
development, office space and warehousing of finished goods and
distribution. We anticipate that construction of the facility
will be complete in mid 2006 and will cost approximately
$44 million, of which $6.3 million was capitalized to
construction in-progress during 2004.
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We also lease the following additional facilities:
Leased Facilities
| Location | Size | Term of Lease | |||||
|
Rancho Bernardo Facility
San Diego, California |
93,646 square feet | Original term of 10 years with three five-year renewal options | |||||
|
Mira Mesa Facility
San Diego, California |
29,133 square feet | Original term of 3 years with one one-year renewal option | |||||
|
Wateridge Facility
San Diego, California |
29,141 square feet | Original term of 3 years with no renewal options | |||||
|
Rehco Facility
San Diego, California |
20,686 square feet | Original term of 3 years with no renewal options | |||||
| Item 3. | Legal Proceedings |
We are a party to the following litigation and are currently
participating in other litigation in the ordinary course of
business. We intend to vigorously defend our interests in these
matters. We expect that the resolution of these matters will not
have a material adverse effect on our business, financial
condition or results of operations. However, due to the
uncertainties inherent in litigation, no assurance can be given
as to the outcome of these proceedings. If any of these matters
were resolved in a manner unfavorable to us, our business,
financial condition and results of operations would be harmed.
| Enzo Biochem, Inc. |
In June 1999, we were sued by Enzo Biochem, Inc. in the United
States District Court for the Southern District of New York.
Enzo alleged that we and other defendants have willfully
infringed United States patent no. 4,900,659, or the
“’659 patent,” through the manufacture and sale
of products for the diagnosis of gonorrhea. Enzo has asserted a
damage claim based on a contention that Enzo is entitled to a
reasonable royalty on all sales of our products for the
detection of Neisseria gonorrhoeae bacteria from June
1993 through trial. Revenues from tests for the detection of
Neisseria gonorrhoeae have constituted a significant
portion of our revenues during the relevant period. We believe
that the claims of the ’659 patent are invalid,
unenforceable and may not be properly interpreted to cover our
products. In July 2004, the Court granted summary judgment in
favor of us and the other defendants and against Enzo, holding
that the ’659 patent is invalid based on the on-sale
doctrine. Enzo has appealed the summary judgment to the United
States Court of Appeals for the Federal Circuit. The parties
have not yet completed their submissions of briefs to the Court
of Appeals. The Company intends to vigorously defend the
lawsuit. However, there can be no assurance that the case will
be resolved in our favor.
| Bayer Corporation |
In November 2002, we filed a demand for arbitration against
Bayer Corporation, or Bayer, in the Judicial
Arbitration & Mediation Services, Inc., or JAMS, office
in San Diego, California related to our collaboration with
Bayer for nucleic acid diagnostic tests for viral organisms.
Under the terms of the collaboration agreement, Bayer acquired
the exclusive right to distribute nucleic acid diagnostic tests
designed and developed by us for the detection of HIV, hepatitis
viruses and other specified viruses, subject to certain
conditions. Our demand for arbitration states that Bayer has
failed to fulfill the conditions required to maintain exclusive
distribution rights. The arbitration demand seeks confirmation
that the agreement grants us, in the present circumstances, a
co-exclusive right to directly distribute the viral diagnostic
tests that are the subject of the agreement. In November 2003,
Bayer filed a counterclaim for money damages based on alleged
delays in the development of the TIGRIS instrument, alleged
delays in the development of certain assays, and other claims.
Bayer Healthcare LLC has also been added as a respondent
and counterclaimant. The hearing on the matter began on
September 13, 2004 and closing arguments were completed on
November 3, 2004. The
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arbitrator agreed to review additional written testimony
following closing arguments, and has informed the parties that
he intends to issue a written decision on or about
March 25, 2005. There can be no assurances as to the final
outcome of the arbitration.
On March 17, 2004, the Company filed a patent infringement
action in the United States District Court for the Southern
District of California against Bayer Corporation and Bayer
Healthcare LLC, alleging that Bayer’s bDNA nucleic acid
tests for HIV and HCV infringe Gen-Probe’s U.S. patent
no. 5,955,261, entitled “Method for Detecting the Presence
of Group-Specific Viral mRNA in a Sample.” Bayer’s
bDNA tests are not covered by the collaboration agreement
between the companies. Bayer has denied the allegations of
infringement and alleged that the patent is invalid or
unenforceable. No trial date has been set. There can be no
assurances as to the final outcome of the litigation.
| Item 4. | Submission of Matters to a Vote of Security Holders |
No matters were submitted to a vote of security holders during
the quarter ended December 31, 2004.
PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Our common stock has been traded on the Nasdaq National Market
since September 16, 2002 under the symbol GPRO. Prior to
that time, there was no public market for our common stock. The
following table sets forth the high and low sale prices for our
common stock as reported on the Nasdaq National Market for the
periods indicated. All share prices reflect the 2-for-1 stock
split implemented as a 100% stock dividend in September 2003.
| High | Low | |||||||
| 2003 | ||||||||
|
First Quarter
|
$ | 14.23 | $ | 10.38 | ||||
|
Second Quarter
|
$ | 21.93 | $ | 10.88 | ||||
|
Third Quarter
|
$ | 34.37 | $ | 20.05 | ||||
|
Fourth Quarter
|
$ | 38.00 | $ | 21.45 | ||||
| High | Low | |||||||
| 2004 | ||||||||
|
First Quarter
|
$ | 39.93 | $ | 31.40 | ||||
|
Second Quarter
|
$ | 47.61 | $ | 32.80 | ||||
|
Third Quarter
|
$ | 45.63 | $ | 29.40 | ||||
|
Fourth Quarter
|
$ | 47.10 | $ | 31.52 | ||||
As of March 1, 2005, there were approximately 7,639
stockholders of record of our common stock. We have not paid any
cash dividends to date and do not anticipate any being paid in
the foreseeable future.
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Table of Contents
| Item 6. | Selected Financial Data |
SELECTED FINANCIAL INFORMATION
The selected financial data set forth below with respect to our
consolidated statements of income for each of the three years in
the period ended December 31, 2004 and, with respect to our
consolidated balance sheets, at December 31, 2004 and 2003
are derived from our consolidated financial statements that have
been audited by Ernst & Young LLP, independent
registered public accounting firm, which are included elsewhere
in this report. The statement of income (loss) data for the
years ended December 31, 2001 and 2000 and the balance
sheet data as of December 31, 2002, 2001, and 2000 are
derived from our audited consolidated financial statements that
are not included in this report. The selected financial
information set forth below should be read in conjunction with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated
financial statements and related notes appearing elsewhere in
this report.
| 2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||||||
|
Statement of income (loss) data for the years ended
December 31:
|
|||||||||||||||||||||
|
Revenues:
|
|||||||||||||||||||||
|
Product sales
|
$ | 222,560 | $ | 188,645 | $ | 139,932 | $ | 104,233 | $ | 100,162 | |||||||||||
|
Collaborative research revenue
|
27,122 | 15,402 | 11,032 | 20,203 | 13,764 | ||||||||||||||||
|
Royalty and license revenue
|
20,025 | 3,144 | 4,633 | 5,295 | 5,615 | ||||||||||||||||
|
Total revenues
|
269,707 | 207,191 | 155,597 | 129,731 | 119,541 | ||||||||||||||||
|
Operating expenses:
|
|||||||||||||||||||||
|
Cost of product sales
|
59,908 | 45,458 | 53,411 | 38,954 | 34,463 | ||||||||||||||||
|
Research and development
|
68,482 | 63,565 | 47,045 | 54,915 | 59,902 | ||||||||||||||||
|
Marketing and sales
|
27,191 | 22,586 | 18,199 | 16,247 | 14,508 | ||||||||||||||||
|
General and administrative
|
31,628 | 23,233 | 20,995 | 15,564 | 12,628 | ||||||||||||||||
|
Total operating expenses
|
187,209 | 154,842 | 139,650 | 125,680 | 121,501 | ||||||||||||||||
|
Income (loss) from operations
|
82,498 | 52,349 | 15,947 | 4,051 | (1,960 | ) | |||||||||||||||
|
Net income (loss)
|
$ | 54,575 | $ | 35,330 | $ | 13,007 | $ | 4,617 | $ | (1,008 | ) | ||||||||||
|
Net income (loss) per share
|
|||||||||||||||||||||
|
Basic
|
$ | 1.10 | $ | 0.74 | $ | 0.27 | $ | 0.10 | $ | (0.02 | ) | ||||||||||
|
Diluted
|
$ | 1.06 | $ | 0.72 | $ | 0.27 | $ | 0.10 | $ | (0.02 | ) | ||||||||||
|
Weighted average shares outstanding
|
|||||||||||||||||||||
|
Basic
|
49,429 | 47,974 | 47,600 | 47,600 | 47,600 | ||||||||||||||||
|
Diluted
|
51,403 | 49,137 | 47,610 | 47,606 | 47,600 | ||||||||||||||||
|
Balance sheet data as of December 31:
|
|||||||||||||||||||||
|
Cash, cash equivalents and short-term investments
|
$ | 193,826 | $ | 156,306 | $ | 107,960 | $ | 17,750 | $ | 12,584 | |||||||||||
|
Working capital
|
234,202 | 169,000 | 115,288 | 29,765 | 29,439 | ||||||||||||||||
|
Total assets
|
411,082 | 324,741 | 258,157 | 160,347 | 156,612 | ||||||||||||||||
|
Long-term debt, including current portion
|
— | — | — | 12,000 | 14,000 | ||||||||||||||||
|
Stockholders’ equity
|
361,029 | 270,375 | 215,578 | 115,807 | 111,180 | ||||||||||||||||
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Table of Contents
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This report contains “forward-looking” statements
within the meaning of the Private Securities Litigation Reform
Act of 1995 which provides a “safe harbor” for these
types of statements. To the extent statements in this report
involve, without limitation, our expectations for growth,
estimates of future revenue, expenses, profit, cash flow,
balance sheet items or any other guidance on future periods,
these statements are forward-looking statements. Forward-looking
statements are not guarantees of performance. They involve known
and unknown risks, uncertainties and assumptions that may cause
actual results, levels of activity, performance or achievements
to differ materially from any results, level of activity,
performance or achievements expressed or implied by any
forward-looking statement. These risks and uncertainties include
those included herein under the caption “Risk Factors”
in “Item 1. Business.” We assume no obligation to
update any forward-looking statements. The audited consolidated
financial statements and this Management’s Discussion and
Analysis of Financial Condition and Results of Operations should
be read in conjunction with the Consolidated Financial
Statements and Notes thereto for the years ended
December 31, 2004, 2003 and 2002 in this Annual Report on
Form 10-K.
Overview
We are a global leader in the development, manufacture and
marketing of rapid, accurate and cost-effective nucleic acid
probe-based products used for the clinical diagnosis of human
diseases and for the screening of donated human blood. We have
over 22 years of nucleic acid detection research and
product development experience, and our products, which are
based on our patented nucleic acid testing, or NAT, technology,
are used daily in clinical laboratories and blood collection
centers in major countries throughout the world.
In September 2002, our common stock began trading on the NASDAQ
National Market. As a publicly traded company, we have achieved
strong growth in both revenues and earnings due principally to
the success of our blood screening products which are used to
detect the presence of human immunodeficiency virus
(type 1), or HIV-1, and hepatitis C virus, or HCV, and
hepatitis B, or HBV. Under our collaboration agreement with
Chiron Corporation, or Chiron, we are responsible for the
research, development, regulatory process and manufacturing of
our blood screening products while Chiron is responsible for
marketing, sales, distribution and service of those products.
Recent Events
| Financial Results |
During 2004, we achieved strong financial results. Net income
for the year was $54.6 million ($1.06 per diluted
share), compared to $35.3 million ($0.72 per diluted
share) in 2003, an increase of 54%. Total revenues for 2004 were
$269.7 million, compared to $207.2 million in 2003, an
increase of 30%. Product sales for 2004 were
$222.6 million, compared to $188.6 million in 2003, an
increase of 18%. During 2004, net income and total revenues
included a contract milestone of $6.5 million from Chiron
and a license fee of $7.0 million earned in connection with
our cross-licensing agreement with Tosoh Corporation, or Tosoh.
These amounts added approximately $0.17 to diluted earnings per
share and $13.5 million to revenues.
| Corporate Collaborations |
In January 2005, bioMérieux and its affiliates exercised an
option to develop diagnostic products for certain undisclosed
disease targets using our patented ribosomal RNA technologies,
pursuant to the terms of a September 2004 agreement. In exchange
for these rights, bioMérieux and its affiliates paid us a
$4.5 million license fee. We have recorded
$1.9 million of the cumulative payments ($4.5 million
license fee and $0.25 million option fee) as license
revenue in the first quarter of 2005, based on the total number
of targets that may eventually be selected. The amount and
timing of additional revenue that we record will depend on the
number of additional targets, if any, selected by
bioMérieux, which also has options to develop diagnostic
products for other disease targets by paying us up to an
additional $3 million by the end of 2006. Further, we will
receive royalties on the sale of any products developed by
bioMérieux using our intellectual property.
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Table of Contents
In January 2005, we also entered into a license agreement with
Corixa Corporation, or Corixa, and received the right to develop
molecular diagnostic tests for approximately 50 potential
genetic markers in the areas of prostate, ovarian, cervical,
kidney, lung and colon cancers. Pursuant to the terms of the
agreement, we paid Corixa an initial access license fee of
$1.6 million and agreed to pay an additional
$3.2 million in two equal access fees of $1.6 million
on January 31, 2006 and January 31, 2007, unless we
terminate the agreement prior to those dates. We expect to
record the initial $1.6 million license fee as an
intangible asset which will be amortized over the underlying
life of the patents or the term of our rights to these patents,
whichever expires sooner. We also agreed to pay Corixa milestone
payments totaling an additional $2.0 million on a
product-by-product basis based on the occurrence of certain
regulatory and/or commercial events. Further, we agreed to pay
Corixa additional milestone payments and royalties on net sales
of any products developed by us using Corixa’s technology.
In December 2004, we entered into a license agreement with
AdnaGen AG, or AdnaGen, to gain access to technology that may
help increase the accuracy of molecular diagnostic tests to
detect prostate and other cancers. Under the terms of the
agreement, we paid AdnaGen a license fee of $1.0 million,
and agreed to pay $750,000 on the later of February 1, 2006
or upon issuance to AdnaGen of a patent containing valid claims
that cover products licensed under the agreement. We recorded
the $1.0 million license fee as R&D expense in 2004
since we have not yet determined technological feasibility and
do not currently have alternative future plans to use this
technology other than for our prostate cancer development
program. Upon the occurrence of certain clinical, regulatory
and/or commercial events, we agreed to pay AdnaGen up to three
milestone payments totaling an additional $2.25 million.
Further, we agreed to pay AdnaGen royalties on net sales of any
products we develop using AdnaGen’s technology.
In November 2004, we entered into an exclusive option agreement
with Qualigen, Inc. to develop and commercialize a point-of-use
NAT instrument based on Qualigen’s FDA-approved FastPack
immunoassay system. If successfully developed, the portable
instrument would use our NAT technology to detect, at the point
of sample collection, the presence of harmful microorganisms and
genetic mutations. Under the terms of the agreement, we paid
Qualigen $1.0 million for an 18-month option to license, on
an exclusive basis, Qualigen’s technology to develop NAT
assays for the clinical diagnostics, blood screening and
industrial fields. During this period, we intend to evaluate the
feasibility of adapting Qualigen’s immunoassay platform to
perform NAT using our proprietary technologies. If we exercise
this option, at our sole discretion, then we have agreed to
purchase shares of Qualigen preferred stock convertible into
approximately 19.5% of Qualigen’s then outstanding fully
diluted common shares outstanding. The cost of acquiring this
equity interest would vary between $5.9 and $7.0 million,
depending on the timing of the option exercise. In addition, we
may pay Qualigen up to $3.0 million in license fees based
on development milestones, and agreed to pay royalties on any
product sales. We recorded the $1.0 million option fee as
an intangible asset which is being amortized over the 18-month
evaluation period of the option or until execution of the
license, whichever comes first.
In September 2004, we entered into a Settlement Agreement and an
Amendment to our Non-exclusive License Agreement with Vysis,
Inc., or Vysis, under which the Company withdrew its patent
litigation against Vysis and agreed to pay Vysis an aggregate of
$22.5 million. This amount included $20.5 million for
a fully paid up license to eliminate all future royalty
obligations of the Company to Vysis under the Collins patent
covered by the license, and $2.0 million for a fully
paid-up, royalty-free license in additional fields under the
Collins patent. The Company had been paying royalties under a
pre-existing license agreement which has since been amended. The
license now covers current and future products in the field of
infectious diseases, as well as potential products in all other
fields. Chiron reimbursed us $5.5 million of the
$20.5 million allocated to the cost of the fully paid-up
license for the current field, commensurate with its obligation
under their collaboration agreement with us to reimburse the
Company a portion of the royalties paid by the Company to Vysis
on blood screening products. We recorded the $17.0 million
net payment ($22.5 million less Chiron’s
$5.5 million reimbursement) to Vysis as an intangible
asset, which is being amortized to cost of goods sold over the
patent’s remaining economic life of 135 months.
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Table of Contents
| Supply Agreements |
In February 2005, we entered into a Supply and Purchase
Agreement with F. Hoffmann-La Roche Ltd. and its affiliate
Roche Molecular Systems, Inc., or Roche. Under this agreement,
Roche will manufacture and supply DNA probes for human
papillomavirus, or HPV. We will use these probes in molecular
diagnostic assays. Pursuant to the agreement, we will pay Roche
manufacturing fees of $20.0 million within 90 days of
February 15, 2005 and $10.0 million within
10 days of the occurrence of certain future commercial
events. We also agreed to pay Roche transfer fees for the HPV
products.
| Product Development |
We submitted a Biologics License Application, or BLA, for the
West Nile virus, or WNV, assay to the U.S. Federal Drug
Administration, or FDA, during the first quarter of 2005.
Approximately 1200 infected units have been intercepted using
our WNV assay since July of 2003. In addition, our
high-throughput TIGRIS instrument was used by several blood
centers to screen both individual donor and pooled blood
donations for WNV.
We submitted a BLA for the Procleix Ultrio (HIV-1/ HCV/ HBV)
assay to the FDA during the third quarter of 2004. We intend to
seek approval to run the test on both the semi-automated
Procleix system and on the fully automated TIGRIS instrument. We
also submitted a regulatory application to European officials to
run the Procleix Ultrio assay on our TIGRIS instrument. In
January 2004, the Procleix Ultrio assay, running on our
semi-automated instrument system, received its Community
European, or CE, mark, which permitted Chiron to launch the
product in the European Economic Area. Our TIGRIS instrument and
our Procleix Ultrio assay for use on the TIGRIS instrument,
received CE marks in December 2004.
Revenues
We derive revenues from three primary sources: product sales,
collaborative research revenue and royalty and license revenue.
The majority of our revenues come from product sales, which
consist primarily of sales of our NAT assays tested on our
proprietary instruments that serve as the analytical platform
for our assays. We recognize as collaborative research revenue
payments we receive from Chiron for the products we provided
under our collaboration agreements with Chiron prior to
regulatory approval, and the payments we receive from Chiron,
Bayer Corporation, or Bayer, and other collaboration partners,
including the National Institutes of Health, or NIH, for
research and development activities. Our royalty and license
revenues reflect fees paid to us by third parties for the use of
our proprietary technology. In 2004, product sales,
collaborative research revenues and royalty and license revenues
equaled 83%, 10% and 7%, respectively, of our total revenues of
$269.7 million.
| Product sales |
Our primary source of revenue is the sale of clinical diagnostic
products in the United States, which include our APTIMA
Combo 2, PACE 2, AccuProbe and Amplified Mycobacterium
Tuberculosis Direct Test product lines. During 2004, we shipped
approximately 22 million tests for the diagnosis of a wide
variety of infectious microorganisms, including those causing
sexually transmitted diseases, or STDs, tuberculosis, strep
throat, pneumonia and fungal infections. The principal customers
for our clinical diagnostics products include large reference
laboratories, public health laboratories and hospitals located
in North America, Europe and Japan.
Since 1999, we have supplied NAT assays for use in screening
blood donations intended for transfusion. Our primary blood
screening assay detects HIV-1 and HCV in donated human blood.
Our blood screening assays and instruments are marketed through
our collaboration with Chiron under the Procleix and Ultrio
trademarks. We recognize product sales from the manufacture and
shipment of tests for screening donated blood at a contractual
transfer price, through our collaboration with Chiron, to blood
bank facilities located in the countries where our products have
obtained governmental approvals. Blood screening product sales
are then adjusted monthly corresponding to Chiron’s payment
to us of amounts reflecting our ultimate share of net revenue
from sales by Chiron to the end user, less the transfer price
revenues previously recorded. Net sales
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are ultimately equal to the sales of the assays by Chiron to
third-parties, less freight, duty and certain other adjustments
specified in our agreement with Chiron, multiplied by our share
of the net revenue. Our share of the net revenue was 43.0% with
respect to sales of assays that include a test for HCV beginning
the second quarter of 2002 (following FDA approval in February
2002) upon implementation of commercial pricing, through
April 6, 2003, after which our share of net revenues from
sales of assays that include a test for HCV was adjusted to
47.5%. Effective January 1, 2004, our share of net revenues
from commercial sales of assays that include a test for HCV was
permanently changed to 45.75% under our agreement with Chiron.
With respect to commercial sales of blood screening assays under
our collaboration with Chiron that do not include a test for
HCV, such as possible future commercial tests for WNV, we will
continue to receive reimbursement for our manufacturing costs
plus 50% of net revenues. Our costs related to these products
primarily include manufacturing costs.
| Collaborative research revenue |
We have recorded revenues related to use of our blood screening
products in the United States and other countries in which the
products have not received regulatory approval as collaborative
research revenue, because price restrictions applied to these
products prior to FDA license approval in the United States and
similar approvals in foreign countries. In 2004 and 2003, we
recognized $18.5 million and $6.0 million,
respectively, as collaborative research revenue through our
collaboration with Chiron from deliveries of WNV tests on a
“cost recovery” basis. Our NAT assay to detect WNV is
currently being used in clinical trials under an Investigational
New Drug, or IND, application. In 2004, we recognized
$1.4 million in reimbursements for expenses incurred for
WNV. We expect to continue recognizing these sales as
collaborative research revenue until FDA approval has been
received, although there is no guarantee we ultimately will
receive FDA approval.
In March 2003, we signed a definitive agreement with Chiron for
the development and commercialization of the Procleix Ultrio
assay. In 2004, we recognized $2.8 million in
reimbursements for expenses incurred related to the development
of this assay. We expect to receive further reimbursement from
Chiron for certain costs incurred during the development of the
Procleix Ultrio and WNV assays. In January 2004, we commenced
clinical trials of the Procleix Ultrio assay in the United
States on our TIGRIS instrument. In September 2004, we filed a
BLA with the FDA for this assay.
We recognize collaborative research revenue over the term of our
strategic alliance agreement with Chiron as reimbursable costs
are incurred. The costs associated with the reported
collaborative research revenue are based on fully burdened full
time equivalent, or FTE, rates and are reflected in our
statements of income under the captions “Research and
development,” “Marketing and sales” and
“General and administrative,” based on the nature of
the costs. We do not separately track all of the costs
applicable to our blood screening development collaboration with
Chiron and, therefore, are not able to quantify all of the
direct costs associated with the collaborative research revenue.
Since 1996, we have been awarded contracts aggregating
approximately $28.2 million by the NIH to develop NAT
assays for screening donated blood for HIV-1, HCV, hepatitis B
virus, or HBV, and WNV. To date, all payments due to us under
these reimbursement contracts have been received and have been
recorded as collaborative research revenues as reimbursable
costs were incurred. As of December 31, 2004, the Company
has billed all monies remaining under these contracts.
| Royalty and license revenue |
We recognize non-refundable up-front license fees over the
performance period of the applicable agreement or at the time
that we have satisfied all substantive performance obligations
under such agreement. We also receive milestone payments for
successful achievement of contractual development activities.
Milestone payments are recognized as revenue upon the
achievement of specified milestones when (i) we have earned
the milestone payment, (ii) the milestone is substantive in
nature and the achievement of the milestone is not reasonably
assured at the inception of the agreement, and (iii) the
fees are non-refundable.
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Any amounts received prior to satisfying our revenue recognition
criteria are recorded as deferred revenue on our balance sheet.
In December 2003, we entered into an agreement with Tosoh to
cross-license intellectual property covering certain NAT
technologies. The licenses, which were effective January 1,
2004, cover products in clinical diagnostics and other related
fields. Under the agreement, Tosoh received non-exclusive rights
to our proprietary Transcription-Mediated Amplification, or TMA,
and rRNA technologies in exchange for two payments to us
totaling $7.0 million. These payments were recognized as
revenue in the first quarter of 2004 as there were no additional
obligations placed on us after the effective date of the
contract and the transfer of rights to the technology. Further,
Tosoh agreed to pay us royalties on worldwide sales of any
future products that employ our technologies licensed by Tosoh.
We also have gained access, in exchange for the payment of
royalties, to Tosoh’s patented Transcription
Reverse-Transcription Concerted, or TRC, amplification and
Intercalation Activating Fluorescence, or INAF, detection
technologies for use with our real time TMA technology.
Under the strategic alliance agreement we entered into with
Chiron in June 1998, we have responsibility for research,
development and manufacturing of the blood screening products
covered by the agreement, while Chiron has responsibility for
marketing, distribution and service of the blood screening
products worldwide. During the first quarter of 2004, we
recognized as royalty and license revenue, a $6.5 million
milestone payment from Chiron as we commenced clinical trials of
the Procleix Ultrio assay on our TIGRIS instrument in the United
States. An additional payment of $10.0 million is due to us
in the future under the agreement if we obtain FDA approval of
our Ultrio assay for use on the TIGRIS instrument. There is no
guarantee we will achieve these milestones and receive any
additional milestone payments under this agreement.
| Cost of product sales |
Cost of product sales includes direct material, direct labor,
and manufacturing overhead associated with the production of
inventory on a standard cost basis. Indirect cost elements,
which include manufacturing variances, purchase price variances,
and allowances for scrap are also included as a component of
cost of product sales, as well as certain related expenses, such
as royalties, warranty, and instrument amortization.
In addition, we manufacture significant quantities of raw
materials, development lots, and clinical trial lots of product
prior to receiving FDA approval for commercial sale. During 2004
and 2003, our manufacturing facilities produced development lots
for WNV and Procleix Ultrio assays. The majority of costs
associated with these development lots are classified as
research and development expense. The portion of a development
lot that is manufactured to support In-Vitro Diagnostic, or IVD,
sales abroad is charged to inventory and classified as cost of
product sales upon shipment.
Our blood screening manufacturing facility has operated below
its capacity and will continue to operate below its potential
capacity for the foreseeable future. A portion of this available
capacity is utilized for research and development activities as
new product offerings are developed for commercialization. As a
result, certain operating costs of our blood screening facility,
together with other manufacturing costs for the production of
pre-commercial development lot assays that are delivered under
the terms of an IND application, are classified as research and
development expense prior to FDA approval.
Effective January 1, 2004, our revenue sharing percentage
with Chiron was reduced from 47.5% to 45.75%. This change,
combined with higher instrument costs, including the
amortization of our capitalized software development costs
(which we began to amortize in 2004) and related service costs
attributed to the general commercial launch of our TIGRIS
instrument, contributed to lower 2004 gross margin percentage
levels. In addition, our non-military customers currently
utilize pooled blood screening samples for testing. We
anticipate that requirements for smaller pool sizes or
ultimately individual donor testing, if and when implemented,
could result in lower gross margin rates, as additional tests
would be required to deliver the sample results, unless a
corresponding increase in sales pricing is implemented. We are
not able to accurately predict the extent to which our gross
margin may be affected as a result of smaller pool sizes or
individual donor testing because we do not know the ultimate
selling price that Chiron, our distributor, would charge to the
end user if smaller pool sizes or individual donor testing is
implemented.
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| Research and development |
We invest significantly in research and development, or R&D,
as part of our ongoing efforts to develop new products and
technologies. Our R&D expenses include the development of
proprietary products and instrument platforms, as well as
expenses related to the co-development of new products and
technologies in collaboration with our strategic partners.
R&D spending is expected to increase in the future due to
new product development, clinical trial costs and clinical
manufacturing costs; however, we expect our R&D expenses as
a percentage of total revenues to decline in future years. The
timing of clinical trials and development manufacturing costs is
variable and is affected by product development activities and
the regulatory process.
In connection with our R&D efforts, we have various license
agreements which provide us with rights to develop and market
products using certain technologies and patent rights maintained
by third parties. These agreements generally provide for a term
that commences upon execution of the agreement and continues
until expiration of the last patent related to the technologies
covered by the license.
R&D expenses include the costs of raw materials, development
lots and clinical trial lots of products that we manufacture.
These costs are dependent on the status of projects under
development and may vary substantially between quarterly or
annual reporting periods. During 2005, we expect to incur
further incremental costs associated with the manufacture of
developmental lots and clinical trial lots for our blood
screening products and with further development of our TIGRIS
instrument. Collaborative research revenues associated with
these types of incurred costs have at times been realized in a
period later than when incurred due to the need for further
clarity on the extent of reimbursable costs.
Critical accounting policies and estimates
Our discussion and analysis of our financial condition and
results of operations is based on our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. On an ongoing
basis, we evaluate our estimates, including those related to
revenue recognition, the collectibility of accounts receivable,
valuation of inventories, long-lived assets including patent
costs and capitalized software, and income taxes. We base our
estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities.
Senior management has discussed the development, selection and
disclosure of these estimates with the Audit Committee of our
Board of Directors. Actual results may differ from these
estimates.
We believe the following critical accounting policies affect the
significant judgments and estimates used in the preparation of
our consolidated financial statements.
| Revenue recognition |
We record shipments of our clinical diagnostic products as
product sales when the product is shipped and title and risk of
loss has passed and when collection of the resulting receivable
is reasonably assured. Revenue from our blood screening products
shipped to countries where regulatory approval has been received
is recorded as product sales based on a contracted transfer
price with our third-party collaboration partner, Chiron. Based
on the terms of our agreement with Chiron, our ultimate share of
the net revenue from sales to the end user is not known until
reported by Chiron.
We manufacture our blood screening products according to
Chiron’s demand specifications and transfer/shipment of
completed product to Chiron’s virtual warehouse, which
consists of various interim locations on our premises. Upon
transfer/shipment of completed product to Chiron’s virtual
warehouse, we bill Chiron at a cost recovery transfer price, and
Chiron remits payment in 30 days. We record amounts billed
as deferred revenue until product shipment is made to
Chiron’s end-customers. Customer orders for the assay are
received by Chiron and then communicated to our personnel who
fulfill the orders and ship to Chiron’s
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end-customers. Upon shipment to the end-customer, we recognize
blood screening product sales at the transfer price and record
cost of products sold at the cost of our assays. Blood screening
product sales are adjusted upon our receipt of payment from
Chiron of amounts reflecting our ultimate share of net sales by
Chiron of these products, less the transfer price revenues
previously paid.
Product sales also include the sales or rental value associated
with the delivery of our proprietary integrated instrument
platforms that perform our NAT assays. Generally, we provide our
instrumentation to clinical laboratories and hospitals without
requiring them to purchase the equipment or enter into an
equipment lease. Instead, we recover the cost of providing the
instrumentation in the amounts we charge for our diagnostic
assays. The costs associated with an instrument are charged to
costs of product sales on a straight-line basis over the
estimated life of an instrument, which ranges from three to five
years; generally, three years for luminometers and DTS 400/800
systems, and five years for TIGRIS and DTS 800/1600 systems. The
costs to maintain these systems in the field are charged to
operations as incurred.
We sell our instrumentation to Chiron for use in blood screening
and record these instrument sales upon delivery since Chiron is
responsible for the placement, maintenance and repair of the
units with their customers. Occasionally, we sell
instrumentation to our clinical diagnostics customers. We record
sales of these instruments as product sales upon delivery and
receipt of customer acceptance. Prior to delivery, each
instrument is extensively tested to meet Company and FDA
specifications, and is shipped fully assembled. Customer
acceptance of our instrument systems requires installation and
training by our technical service personnel. Generally,
installation is a standard process consisting principally of
uncrating, calibrating, and testing the instrumentation.
We record as collaborative research revenue shipments of our
blood screening products in the United States and other
countries in which the products have not received regulatory
approval. We do this because price restrictions apply to these
products prior to FDA marketing approval in the United States
and similar approvals in foreign countries. As commercial
pricing is implemented, we classify sales of these products as
product sales in our financial statements.
We recognize collaborative research revenue over the term of
various collaboration agreements as negotiated monthly
contracted amounts are earned or reimbursable costs are incurred
related to that agreement. Negotiated monthly contracted amounts
are earned in relative proportion to the performance required
under the contracts. Non-refundable license fees are recognized
over the related performance period or at the time that we have
satisfied all performance obligations related to the agreement.
Milestone payments are recognized as revenue upon the
achievement of specified milestones when (i) we have earned
the milestone payment, (ii) the milestone is substantive in
nature and the achievement of the milestone is not reasonably
assured at the inception of the agreement, and (iii) the
fees are non-refundable. Any amounts received prior to
satisfying our revenue recognition criteria are recorded as
deferred revenue on our balance sheet.
We recognize royalty revenue related to the manufacture, sale or
use of our products or technologies under license agreements
with third parties. For those arrangements where royalties are
reasonably estimable, we recognize revenue based on estimates of
royalties earned during the applicable period and adjust for
differences between the estimated and actual royalties in the
following period. Historically, these adjustments have not been
material. For those arrangements where royalties are not
reasonably estimable, we recognize revenue upon receipt of
royalty statements from the applicable licensee.
| Collectibility of accounts receivable |
We maintain an allowance for doubtful accounts for estimated
losses resulting from the inability of our customers to make
required payments. Credit losses historically have been minimal
and within management’s expectations. If the financial
condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional
allowances would be required.
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| Valuation of inventories |
We record valuation adjustments to our inventory balances for
estimated excess and obsolete inventory equal to the difference
between the cost of such inventory and the estimated market
value based upon assumptions about future product demand and the
shelf-life and expiration dates for finished goods and materials
used in the manufacturing process. We operate in an environment
that is regulated by the FDA and other governmental agencies
that may place restrictions on our ability to sell our products
into the marketplace if certain compliance requirements are not
met. We have made assumptions that are reflected in arriving at
our net inventory value based on the information currently
available to us. If future product demand, regulatory
constraints or other market conditions are less favorable than
those projected by management, additional inventory valuation
reserves may be required.
We also manufacture products to conduct developmental
evaluations and clinical trials and to validate our
manufacturing practices prior to receiving regulatory clearance
or for commercial sale of our products. In these circumstances,
uncertainty exists regarding our ability to sell these products
until the FDA or other governing bodies commercially approve
them. Accordingly, the manufacturing costs of these items in
inventory are recorded as R&D expense. In cases where we
manufacture products that are sold into approved markets and
also maintained for further development evaluations for other
markets, we may also provide valuation allowances for this
inventory due to the historical uncertainties associated with
regulated product introductions. To the extent any of these
previously manufactured products are sold to end users, we
record revenues, subject to any applicable adjustments in
royalty rates under our collaboration agreements with Chiron and
others, and reduce any inventory reserves that are directly
applicable to such products.
| Valuation of goodwill |
We assess the impairment of goodwill whenever events or changes
in circumstances indicate that the carrying value may not be
recoverable. Impairment is reviewed at least annually, generally
in the fourth quarter of each year.
Factors we consider important which could trigger an impairment,
include the following:
| • | Significant underperformance relative to historical or projected future operating results; | |
| • | Significant changes in the manner of our use of the acquired assets or the strategy for our overall business; | |
| • | Significant negative industry or economic trends; | |
| • | Significant declines in our stock price for a sustained period; and | |
| • | Decreased market capitalization relative to net book value. |
When there is an indication that the carrying value of goodwill
may not be recoverable based upon the existence of one or more
of the above indicators, an impairment loss is recognized if the
carrying amount exceeds its fair value.
| Capitalized software costs |
We capitalize costs incurred in the development of computer
software related to products under development after
establishment of technological feasibility. These capitalized
costs are recorded at the lower of unamortized cost or net
realizable value and are amortized over the estimated life of
the related product. At December 31, 2004, capitalized
software development costs related to our TIGRIS instrument
totaled $23.5 million, net of accumulated amortization. We
completed beta evaluations of this instrument for clinical
diagnostic applications and undertook initial beta trials for
blood screening applications before we completed a clinical
trial for a diagnostic application in June 2003. In December
2003, we received approval from the FDA for testing certain STDs
on our TIGRIS instrument. We initiated clinical trials of our
Procleix Ultrio assay on our TIGRIS instrument for a blood
screening application in January 2004 and filed a BLA with the
FDA for this assay in the third quarter of 2004. If we are not
able to successfully deliver this instrument to the
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marketplace and attain customer acceptance, the asset could be
impaired and an adjustment to the carrying value of this asset
would be considered by management at that time.
In accordance with Statement of Financial Accounting Standards,
or SFAS, No. 86, “Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed,” we
began amortizing the capitalized software costs on a
straight-line basis over 120 months during May 2004,
coinciding with the general release of TIGRIS instruments to our
customers.
| Income taxes |
Through December 31, 2002, we were included in the
consolidated federal and in various combined state income tax
returns of our former parent company, Gen-Probe Holding Company,
Inc., formerly known as Chugai Pharma U.S.A., Inc.. Pursuant to
a tax sharing agreement with Gen-Probe Holding Company, we
generally were allocated an amount of the consolidated tax
liability equal to the tax that would have been applicable if
computed separately. At December 31, 2004, we had net
deferred tax liabilities of $1.5 million, which relate to
capitalized costs expensed for tax purposes and other items.
These amounts are offset by research and investment credits
filed in our tax returns, and timing differences arising from
the recording of deferred revenue and certain reserves and
accruals.
In connection with our merger with Gen-Probe Holding Company in
2002, we recorded approximately $2.8 million of deferred
tax assets. These deferred tax assets related principally to
financial statement depreciation in excess of that deducted for
tax purposes and to research and development tax credits
previously held by Chugai Pharma USA, LLC, the successor to our
former sister company Chugai Biopharmaceuticals, Inc., which
have been included in our combined tax returns. These deferred
tax assets may be realized in future periods depending on, among
other factors, whether we have sufficient future taxable income.
The deferred tax assets are fully offset by a valuation reserve
until these deductions and credits are realized. In the event
that we were to determine that we would not be able to realize
all or part of our deferred tax assets in the future, an
adjustment to reduce the deferred tax asset would be made in the
period such determination was made.
It is our policy to establish reserves based upon
management’s assessment of exposure for tax credits claimed
in previously filed tax returns that may become payable upon
audits by tax authorities. The tax reserves are analyzed at
least annually and adjustments are made as events occur to
warrant adjustments to the reserve.
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Results of Operations
The following table sets forth operating data as a percentage of
total revenues:
| Years Ended December 31 | |||||||||||||
| 2004 | 2003 | 2002 | |||||||||||
|
Total revenues
|
100 | % | 100 | % | 100 | % | |||||||
|
Product sales
|
83 | % | 91 | % | 90 | % | |||||||
|
Collaborative research revenue
|
10 | % | 7 | % | 7 | % | |||||||
|
Royalty and license revenue
|
|||||||||||||
|
Operating expenses:
|
7 | % | 2 | % | 3 | % | |||||||
|
Cost of product sales
|
22 | % | 22 | % | 34 | % | |||||||
|
Research and development
|
25 | % | 31 | % | 31 | % | |||||||
|
Marketing and sales
|
10 | % | 11 | % | 12 | % | |||||||
|
General and administrative
|
12 | % | 11 | % | 13 | % | |||||||
|
Total operating expenses
|
69 | % | 75 | % | 90 | % | |||||||
|
Income from operations
|
31 | % | 25 | % | 10 | % | |||||||
|
Total other income (expense)
|
0 | % | 2 | % | 2 | % | |||||||
|
Income before income taxes
|
31 | % | 27 | % | 12 | % | |||||||
|
Income tax expense
|
11 | % | 10 | % | 4 | % | |||||||
|
Net income
|
20 | % | 17 | % | 8 | % | |||||||
| Year Ended December 31, 2004 Compared to Year Ended December 31, 2003 |
(Percentages have been rounded to the
nearest whole percentage)
| Product sales |
Product sales increased $34.0 million, or 18%, to
$222.6 million in 2004 from $188.6 million in 2003.
The increase was principally the result of a $19.0 million
increase in worldwide commercial sales of our Procleix blood
screening products, both in the United States and international
markets, and a $13.1 million increase in STD product sales,
primarily APTIMA. Procleix blood screening product sales
represented $95.6 million, or 43% of product sales in 2004,
compared to $76.6 million, or 41% of product sales, in 2003.
We expect competitive pressures related to our STD and blood
screening products to continue into the foreseeable future,
primarily as a result of the introduction of competing products
into the market and continuing pricing pressure.
| Collaborative research revenue |
Collaborative research revenue increased $11.7 million, or
76%, to $27.1 million in 2004, from $15.4 million in
2003. The increase was primarily the result of a
$12.6 million increase in firm support commitment payments
in connection with the WNV tests provided to United States
customers through our collaboration with Chiron, and a
$1.4 million increase in revenue for reimbursement from
Chiron for WNV development costs. This increase was partially
offset by a $1.9 million decrease in revenue from the NIH
as our WNV funding was completed during 2004 and a
$1.2 million decrease in revenue for reimbursement from
Chiron of our development costs incurred on the Procleix Ultrio
assay.
Collaborative research revenue tends to fluctuate based on the
amount of research services performed, the status of projects
under collaboration and the achievement of milestones. Due to
the nature of our collaborative research revenues, results in
any one period are not necessarily indicative of results to be
achieved in the future. Our ability to generate additional
collaborative research revenues depends, in part, on our ability
to initiate and maintain relationships with potential and
current collaborative partners. These
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relationships may not be established or maintained and current
collaborative research revenue may decline. Shortly after FDA
approval of our Procleix and Ultrio assays, we would expect
Chiron to implement commercial pricing related to the use of
these products which would result in an increase in product
sales partially offset by a decrease in collaborative research
revenue.
| Royalty and license revenue |
Royalty and license revenue increased $16.9 million, or
545%, to $20.0 million in 2004, from $3.1 million in
2003. The increase was principally attributed to
(i) $7.0 million in license fees earned from Tosoh as
part of our non-exclusive licensing agreement relating to NAT
technologies effective in January 2004, and (ii) a
$6.5 million milestone payment from Chiron as we began
clinical trial testing of the Procleix Ultrio assay on our fully
automated TIGRIS instrument in the United States. Further, we
recognized $3.2 million of license revenue from Bayer
during 2004 for the licensing of rights to certain patented
technology.
Royalty and license revenue may fluctuate based on the nature of
the related agreements and the timing of receipt of license
fees. Results in any one period are not necessarily indicative
of results to be achieved in the future. In addition, our
ability to generate additional royalty and license revenues may
depend, in part, on our ability to market and capitalize on our
technologies. We may not be able to do so and future royalty and
license revenue may decline.
| Cost of product sales |
Cost of product sales increased $14.4 million to
$59.9 million, or 27% of product sales revenues in 2004,
from $45.5 million, or 24% of product sales revenues in
2003. The $14.5 million increase in cost of sales was
principally attributed to the volume increase in product sales,
higher allowances for scrap expense and the amortization of
capitalized software development costs related to our TIGRIS
instrument. 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.
Our gross profit margin on product sales decreased to 73% in
2004, from 76% in 2003. The decrease was primarily the result of
higher scrap expense of $5.8 million, including expiration
of enzymes that were produced in support of the Procleix BLA;
increased sales of lower margin products (including TIGRIS
instruments), unfavorably impacting margin by approximately
$1.8 million; and the amortization of capitalized software
development costs of $1.7 million, which began in the
second quarter of 2004; partially offset by lower unit costs on
sales volume increases.
We anticipate that requirements for smaller pool sizes or
ultimately individual donor testing, if and when implemented,
could result in lower gross margin rates as additional tests
would be required to deliver the sample results, unless a
corresponding increase in sales pricing structure is
implemented. We are not able to accurately predict the extent to
which our gross margin may be negatively affected as a result of
smaller pool sizes or individual donor testing because we do not
know the ultimate selling price that Chiron, our distributor,
would charge to the end user if smaller pool sizes or individual
donor testing is implemented.
| Research and development |
Our R&D expenses include salaries and other
personnel-related expenses, temporary personnel, outside
services, laboratory and manufacturing supplies, pre-commercial
development lots and clinical evaluation trials. R&D
expenses increased $4.9 million, or 8%, to
$68.5 million, or 25% of total revenues, in 2004, from
$63.6 million, or 31% of total revenues, in 2003. Increased
R&D spending was comprised of a $9.0 million increase
in expenses resulting from higher staffing levels to support
product development projects and clinical trial efforts, a
$2.2 million increase in expenses related to clinical
trials for blood screening products, a $1.6 million
increase in outside development research due to our aggregate
license fees paid to DiagnoCure and AdnaGen and a
$1.2 million increase in R&D expenses from our
subsidiary, Molecular Light Technology
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Limited (acquired in August 2003). These increases were mostly
offset by a $9.3 million decrease in development lot
production and lower per unit costs.
| Marketing and sales |
Our marketing and sales expenses include personnel costs,
promotional expenses, and outside services. Marketing and sales
expenses increased $4.6 million, or 20%, to
$27.2 million, or 10% of total revenues, in 2004, from
$22.6 million, or 11% of total revenues, in 2003. The
increased spending principally included a $3.7 million
increase in salaries, benefits, commissions and other personnel
related costs in our marketing, sales, and technical service
organization to support APTIMA market expansion and TIGRIS
instrument commercialization, together with a $0.6 million
increase for advertising and promotional costs related to the
marketing launch of our TIGRIS instrument.
| General and administrative |
Our general and administrative, or G&A, expenses include
personnel costs for finance, legal, business development, public
relations and human resources, as well as professional fees,
such as expenses for legal, patents and auditing services.
G&A expenses increased $8.4 million, or 36%, to
$31.6 million, or 12% of total revenues, in 2004 from
$23.2 million, or 11% of total revenues, in 2003. The
increased spending included a $3.0 million increase in
salaries, benefits and other expenses resulting from higher
staffing levels, including $1.0 million in expenses from
our majority owned subsidiary, Molecular Light Technology
Limited; a $3.6 million increase in patent and legal
related expenses, including the costs of our ongoing arbitration
with Bayer; and a $0.7 million non-cash compensation charge
related to the departure of a former executive.
| Total other income (expense) |
Other income (expense) generally consists of investment and
interest income offset by interest expense on borrowing,
minority interest, and other items. The net other income of
$2.1 million in 2004 represented a $0.6 million
decrease from the net other income of $2.7 million in 2003,
which was primarily due to a $0.5 million increase in
realized foreign exchange rate losses.
| Income tax expense |
Income tax expense increased to $30.0 million, or 35.5% of
pretax income, during 2004, from $19.8 million, or 35.9% of
pretax income, in 2003. The slight decrease in our effective tax
rate in 2004 was principally attributed to an increase in
tax-exempt interest income, partially offset by higher profits
taxed at the combined federal and state statutory tax rate of
approximately 41%.
| Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 |
(Percentages have been rounded to the
nearest whole percentage)
| Product sales |
Product sales increased $48.7 million, or 35%, to
$188.6 million in 2003 from $139.9 million in 2002.
The increase was primarily the result of a $38.6 million
increase in commercial sales of Procleix blood screening
products, both in the United States and international markets,
and a $10.3 million increase in STD product sales. Procleix
blood screening product sales represented $76.6 million, or
41% of product sales, for the year ended December 31, 2003,
compared to $38.0 million, or 27% of product sales, for the
year ended December 31, 2002.
| Collaborative research revenue |
Collaborative research revenue increased $4.4 million, or
40%, to $15.4 million in 2003, from $11.0 million in
2002. The increase was primarily the result of a
$4.2 million increase in revenue for reimbursement from
Chiron of our development costs incurred on the Procleix Ultrio
assay. Additionally, revenues increased by $1.8 million in
2003 due to additional funds received from the NIH in November
2003 to develop a NAT
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assay for the detection of WNV. These increases were partially
offset by a $1.1 million decrease in firm support
commitment payments in connection with Procleix tests provided
to United States customers through our collaboration with Chiron.
| Royalty and license revenue |
Royalty and license revenue decreased $1.5 million, or 32%,
to $3.1 million in 2003, from $4.6 million in 2002.
The decrease was primarily the result of $2.6 million in
prepaid license fees and royalties from bioMérieux which
were fully amortized as of December 31, 2002, partially
offset by a $0.8 million increase in net license income
from Bayer for the licensing of rights to certain patented
technology and a $0.3 million increase in minimum annual
royalties from bioMérieux.
| Cost of product sales |
Cost of product sales decreased $7.9 million to
$45.5 million, or 24% of product sales revenues in 2003,
from $53.4 million, or 38% of product sales revenues in
2002. The $7.9 million decrease in cost of sales
principally consisted of a $15.6 million reduction in
manufacturing costs related to costs absorbed by research and
development for the production of pre-commercial development
lots partially offset by a $7.0 million increase in cost of
sales attributable to increases in sales volume.
Our gross profit margin on product sales increased to 76% in
2003, from 62% in 2002. The gross profit margin benefited by
approximately $32.0 million, or 17%, of product sales,
primarily from the implementation of commercial pricing in the
United States for Procleix blood screening products, as well as
an increase in our revenue sharing percentage with Chiron in the
second quarter of 2003. Additionally, our margin benefited from
certain manufacturing costs absorbed by research and development
for the production of pre-commercial development lots.
| Research and development |
Our R&D expenses include salaries and other
personnel-related expenses, temporary personnel expenses,
outside services, laboratory and manufacturing supplies,
pre-commercial development lots and clinical evaluation trials.
R&D expenses increased $16.5 million to
$63.2 million, or 31% of total revenues, in 2003, from
$46.7 million, or 30% of total revenues, in 2002. The
increase was primarily the result of a $12.9 million
increase in the production of pre-commercial development lots
built and expensed during the year, including three WNV and four
Procleix Ultrio development lots, and a $2.3 million
increase in salaries and temporary labor resulting from higher
staffing levels.
| Marketing and sales |
Our marketing and sales expenses include personnel costs,
promotional expenses, and outside services. Marketing and sales
expenses increased $4.4 million, or 24%, to
$22.6 million, or 11% of total revenues in 2003, from
$18.2 million, or 12% of total revenues in 2002. The
increase in expenses was primarily related to a
$1.5 million increase in professional consulting and
personnel costs in our marketing and sales force to support
increases in sales for our clinical diagnostic products.
| General and administrative |
Our G&A expenses include personnel costs for finance, legal,
public relations, human resources and business development, as
well as professional fees, such as expenses for legal, patents
and auditing services. G&A expenses increased
$2.2 million, or 10%, to $23.2 million, or 11% of
total revenues, in 2003, from $21.0 million, or 13% of
total revenues, in 2002. The increase was principally the result
of a $2.2 million increase in salaries and benefits
resulting from higher staffing levels, including our August 2003
acquisition of the majority ownership of Molecular Light
Technology Limited, partially offset by a $1.1 million
decrease in professional fees primarily attributed to our 2002
spin-off from Chugai Pharmaceutical Co., Ltd.
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Table of Contents
| Total other income (expense) |
Other income (expense) generally consists of investment and
interest income offset by interest expense on borrowing,
minority interest, and other items. The net other income of
$2.7 million in 2003 represented a $0.4 million
increase over 2002. During 2003, we reclassified a
$1.25 million charge associated with the early repayment of
debt, which was previously recorded as an extraordinary loss. In
addition, there was a $1.5 million increase in 2003 in
interest income from our short-term investments, a portion of
which was from interest earned on Molecular Light Technology
Limited investment balances. Partially offsetting these net
increases to other income, in 2002 we received in cash and
recognized other income from settlements of outstanding
contractual issues with Chiron in the amount of
$2.4 million and from a former vendor in the amount of
$1.2 million.
| Income tax expense |
Income tax expense increased to $19.8 million, or 35.9% of
pre-tax income, during 2003 from $5.2 million, or 28.6% of
pre-tax income, in 2002. The increase in our effective tax rate
in 2003 was principally attributed to higher profits taxed at
the combined federal and state statutory tax rate of
approximately 41%, partially offset by the benefit of federal
and state research and investment credits.
Liquidity and capital resources
| 2004 | 2003 | 2002 | ||||||||||||
|
December 31:
|
||||||||||||||
|
Cash, cash equivalents and short-term investments
|
$ | 193,826 | $ | 156,306 | $ | 107,960 | ||||||||
|
Working capital
|
234,202 | 169,000 | 115,288 | |||||||||||
|
Current ratio
|
8:1 | 5:1 | 5:1 | |||||||||||
|
Year Ended December 31:
|
||||||||||||||
|
Cash provided by (used in):
|
||||||||||||||
|
Operating activities
|
$ | 62,284 | $ | 52,616 | $ | 42,237 | ||||||||
|
Investing activities
|
(93,712 | ) | (74,787 | ) | (80,747 | ) | ||||||||
|
Financing activities
|
20,438 | 14,888 | 63,878 | |||||||||||
|
Purchases of property, plant and equipment (included in
investing activities above)
|
(26,021 | ) | (12,238 | ) | (12,616 | ) | ||||||||
Historically, we have financed our operations through cash from
operations, cash received from collaborative research
agreements, royalty and license fees, and cash from capital
contributions. At December 31, 2004, we had
$193.8 million of cash and cash equivalents and short-term
investments.
The $9.7 million increase in net cash provided by operating
activities during 2004 was primarily the result of a
$19.2 million increase in net income and a
$14.0 million increase in stock option income tax benefits,
partially offset by a $13.6 million increase in inventory
and a $5.0 million decrease in income tax payable. The
inventory increase was due, in large part, to the
commercialization of our TIGRIS instrument and the European
launch of the Proceix Ultrio assay.
The $18.9 million increase in our investing activities
during 2004 included a net $17.0 million payment to Vysis
for a fully paid up license to eliminate future royalty
obligations under the patent covered by the license. In
addition, our investing activities included a $13.8 million
increase in capital expenditures, partially offset by a
$5.2 million decrease in net purchases of short-term
investments. Our 2004 growth in capital expenditures was
primarily due to the construction of our new building and costs
of our Enterprise Resource Planning, or ERP, system
implementation. Our expenditures for capital additions vary
based on the stage of certain development projects and may
increase in the future related to the timing of development of
new product opportunities and to support expansion of our
facilities in connection with those opportunities. The average
age of our property, plant and equipment is approximately five
years, which provides us flexibility in planning capital
expenditures.
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Table of Contents
The $5.6 million increase in net cash provided by financing
activities during 2004 was principally attributed to a
$3.2 million increase in employee purchases of our common
stock made through our Employee Stock Purchase Plan, or ESPP,
and a $2.4 million increase in proceeds from the exercise
of stock options. On a going-forward basis, cash from financing
activities will be affected by proceeds from the exercise of
stock options and receipts from sales of stock under our ESPP.
We expect fluctuations to occur throughout the year, as the
amount and frequency of stock-related transactions are dependent
upon the market performance of our common stock, along with
other factors.
We have an unsecured bank line of credit agreement with Wells
Fargo Bank, N.A., which expires in July 2005, under which we may
borrow up to $10.0 million, subject to a “borrowing
base formula,” at the bank’s prime rate, or at LIBOR
plus 1.0%. We have not taken advances against the line of credit
since its inception. The line of credit agreement requires us to
comply with various financial and restrictive covenants.
Financial covenants include requirements as to tangible net
worth, liabilities as a percentage of tangible net worth, the
ratio of current assets to current liabilities, required minimum
levels of earnings before interest, taxes, depreciation and
amortization, the ratio of funded debt to earnings before
interest, taxes, depreciation and amortization, and maximum
levels of pre-tax and after tax losses. At December 31,
2004, we were in compliance with all covenants.
In July 2004, we commenced construction of an additional
building to expand our main Genetic Center Drive campus. This
new building will consist of an approximately
291,000 square foot outside shell, with approximately
190,000 square feet built-out with interior improvements.
The additional space that will not initially be built-out will
allow for future expansion. The first phase of this project is
currently estimated to cost approximately $44.0 million, of
which $6.3 million was capitalized to construction
in-progress during 2004. These costs are being capitalized as
incurred and depreciation will commence upon our completion and
use, which is planned for early 2006. These amounts are not
included in the chart below.
We have recently implemented a new ERP software system which
cost approximately $4.9 million in 2004. We expect to incur
approximately $3.1 million of costs in 2005 for further
improvement to the Company’s ERP system.
Further, we expect to incur approximately $5.0 million to
purchase TIGRIS instruments that will be added to our installed
base during 2005.
| Contractual obligations and commercial commitments |
Our contractual obligations due to lessors for properties that
we lease, as well as other amounts due for purchase commitments
as of December 31, 2004 were as follows (amounts in
thousands):
| Contractual Obligations | Total | 2005 | 2006 | 2007 | 2008 | 2009 | Thereafter | |||||||||||||||||||||
|
Operating
leases(1)
|
$ | 5,045 | $ | 2,422 | $ | 1,762 | $ | 765 | $ | 96 | $ | — | $ | — | ||||||||||||||
|
Material purchase
commitments(2)
|
15,085 | 15,085 | — | — | — | — | — | |||||||||||||||||||||
|
Total(3)
|
$ | 20,130 | $ | 17,507 | $ | 1,762 | $ | 765 | $ | 96 | $ | — | $ | — | ||||||||||||||
| (1) | Reflects obligations on facilities under operating leases in place as of December 31, 2004. Future minimum lease payments are included in the table above. |
| (2) | Amounts represent our minimum purchase commitments from two key vendors for raw materials used in manufacturing and instrumentation. |
| (3) | Does not include amounts relating to our obligations under our collaboration with Chiron, pursuant to which both parties have obligations to each other. We are obligated to manufacture and supply our blood screening assay to Chiron, and Chiron is obligated to purchase all of the quantities of this assay specified on a 90-day demand forecast, due 90 days prior to the date Chiron intends to take delivery, and certain quantities specified on a rolling 12-month forecast. |
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We have entered into various license and collaboration
agreements which may require us to make future payments for
fees, contract development payments, milestones, royalties, or
equity investments. These amounts are not included in the chart
above.
Our collaboration commitments include:
| • | DiagnoCure. As part of our collaboration to develop a molecular diagnostic test that detects a new gene marker for prostate cancer, approximately $5.7 million remains to be paid to DiagnoCure pursuant to this obligation. | |
| • | Corixa. As part of our license to develop molecular diagnostic tests for approximately 50 potential genetic markers in the areas of prostate, ovarian, cervical, kidney, lung and colon cancer, approximately $5.2 million remains to be paid to Corixa. | |
| • | Qualigen. If we exercise our option to develop a point-of-use NAT instrument, we will purchase an equity interest in Qualigen ranging from $5.9 to $7.0 million. Further, we may pay Qualigen up to $3.0 million based on development milestones. | |
| • | AdnaGen. As part of our license to technology that may help increase the accuracy of molecular diagnostic tests to develop prostate and other cancers, we may pay AdnaGen up to $3.0 million based on achievement of certain milestones. |
Our supply commitments include:
| • | Roche. As part of our HPV DNA probes supply and purchase agreement, we will pay Roche $20.0 million in May 2005 and may pay $10.0 million upon achievement of certain commercial events. Further, we have agreed to pay Roche transfer fees for the HPV products. |
Our primary short-term needs for capital, which are subject to
change, are for expansion of our Genetic Center Drive campus,
continued research and development of new products, costs
related to commercialization of blood screening products and
purchases of the TIGRIS instrument for placement with our
customers. Certain research and development costs are funded
under collaboration agreements with partners or agencies of the
United States government.
We believe that our available cash balances, anticipated cash
flows from operations and proceeds from stock option exercises,
and available line of credit will be sufficient to satisfy our
operating needs for the foreseeable future. However, we operate
in a rapidly evolving and often unpredictable business
environment that may change the timing or amount of expected
future cash receipts and expenditures. Accordingly, we may in
the future be required to raise additional funds through the
sale of equity or debt securities or from additional credit
facilities. Additional capital, if needed, may not be available
on satisfactory terms, if at all. Furthermore, additional debt
financing may contain more restrictive covenants than our
existing debt.
We may from time to time consider the acquisition of businesses
and/or technologies complementary to our business. We could
require debt financing if we were to engage in a material
acquisition in the future. In August 2003, we filed a
Form S-3 shelf registration statement with the SEC relating
to the possible future sale of up to an aggregate of
$150 million of debt or equity securities.
Stock Options
| Option program description |
Our stock option program is a broad-based, long-term retention
program that is intended to attract and retain talented
employees and to align stockholder and employee interests. Our
program primarily consists of three broad-based plans under
which stock options are granted to employees, directors and
other service providers. Substantially all of our employees have
historically participated in our stock option program.
All stock option grants are made with the approval of the
Compensation Committee of the Board of Directors. Additional
information regarding our stock option plans for 2004, 2003 and
2002 is provided in our consolidated financial statements. See
“Notes to Consolidated Financial Statements,
Note 8 — Stockholders’ Equity.”
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Table of Contents
| General option and equity compensation plan information |
All of our equity compensation plans under which options are
currently outstanding or under which shares remain available for
future issuance as summarized below have been approved by our
stockholders.
Summary of Option Activity
(Shares in thousands)
| Options Outstanding | ||||||||||||
| Shares | ||||||||||||
| Remaining | Number of | Weighted | ||||||||||
| Available | Shares to be | Average | ||||||||||
| for Future | Issued upon | Exercise | ||||||||||
| Issuance | Exercise | Price | ||||||||||
|
December 31, 2002
|
502 | 4,678 | $ | 12.93 | ||||||||
|
Grants
|
(2,044 | ) | 2,044 | 27.19 | ||||||||
|
Exercises
|
— | (1,083 | ) | 13.20 | ||||||||
|
Cancellations
|
166 | (166 | ) | 16.34 | ||||||||
|
Additional shares reserved
|
5,000 | — | — | |||||||||
|
December 31, 2003
|
3,624 | 5,473 | $ | 18.10 | ||||||||
|
Grants
|
(2,061 | ) | 2,061 | 37.21 | ||||||||
|
Exercises
|
— | (1,178 | ) | 14.15 | ||||||||
|
Cancellations
|
352 | (352 | ) | 24.97 | ||||||||
|
Additional shares reserved
|
— | — | — | |||||||||
|
December 31, 2004
|
1,915 | 6,004 | $ | 25.03 | ||||||||
In-the-Money and Out-of-the-Money Option Information
(Shares in thousands)
| Exercisable | Unexercisable | Total | ||||||||||||||||||||||
| Wtd. Avg. | Wtd. Avg. | Wtd. Avg. | ||||||||||||||||||||||
| Exercise | Exercise | Exercise | ||||||||||||||||||||||
| Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||
| As of December 31, 2004 | ||||||||||||||||||||||||
|
In-the-Money
|
2,208 | $ | 16.73 | 3,758 | $ | 29.68 | 5,966 | $ | 24.89 | |||||||||||||||
|
Out-of-the Money(1)
|
— | — | 38 | 47.32 | 38 | 47.32 | ||||||||||||||||||
|
Total Options Outstanding
|
2,208 | 3,796 | 6,004 | |||||||||||||||||||||
| (1) | Out-of-the-money options are those options with an exercise price equal to or greater than the fair market value of Gen-Probe Common Stock, $45.21, at the close of business on December 31, 2004. |
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
Our exposure to market risk for changes in interest rates
relates primarily to the increase or decrease in the amount of
interest income we can earn on our investment portfolio. Our
risk associated with fluctuating interest income is limited to
our investments in interest rate sensitive financial
instruments. Under our current policies, we do not use interest
rate derivative instruments to manage this exposure to interest
rate changes. We seek to ensure the safety and preservation of
our invested principal by limiting default risk, market risk,
and reinvestment risk. We mitigate default risk by investing in
short-term investment grade securities. A
68
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hypothetical 100 basis point adverse move in interest rates
along the entire interest rate yield curve would not materially
affect the fair value of our financial instruments that are
exposed to changes in interest rates.
| Foreign Currency Exchange Risk |
Although the majority of our revenue is realized in United
States dollars, some portions of our revenue are realized in
foreign currencies. As a result, our financial results could be
affected by factors such as changes in foreign currency exchange
rates or weak economic conditions in foreign markets. The
functional currencies of our majority owned subsidiaries is the
British pound. Accordingly, the accounts of these operations are
translated from the local currency to the United States dollar
using the current exchange rate in effect at the balance sheet
date for the balance sheet accounts, and using the average
exchange rate during the period for revenue and expense
accounts. The effects of translation are recorded in accumulated
other comprehensive income as a separate component of
stockholders’ equity.
We are exposed to foreign exchange risk from transactions
denominated in certain foreign countries, but the total
receivables and payables denominated in foreign currencies at
December 31, 2004 were not material. We believe that our
business operations are not exposed to market risk relating to
commodity price risk.
| Item 8. | Consolidated Financial Statements and Supplementary Data |
Our consolidated financial statements and the Reports of
Ernst & Young LLP, our Independent Registered Public
Accounting Firm, are included in this Annual Report on
Form 10-K on pages F-1 through F-31.
| Item 9. | Changes in and Disagreements with Independent Registered Public Accounting Firm on Accounting and Financial Disclosure |
None.
Item 9A. Controls and Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SEC’s
rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable and not
absolute assurance of achieving the desired control objectives.
In reaching a reasonable level of assurance, management
necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
In addition, the design of any system of controls also is based
in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions; over time, control may become inadequate because of
changes in conditions, or the degree of compliance with policies
or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.
Conclusion Regarding the Effectiveness of Disclosure Controls
and Procedures
As of the end of the period covered by this Annual Report on
Form 10-K, we carried out an evaluation, under the
supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of the end
of the year ended December 31, 2004.
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Table of Contents
Changes in Internal Control Over Financial Reporting
An evaluation was also performed under the supervision and with
the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of any change in
our internal control over financial reporting that occurred
during our last fiscal quarter and that has materially affected,
or is reasonably likely to materially affect, our internal
control over financial reporting. That evaluation did not
identify any change in our internal control over financial
reporting that occurred during our latest fiscal quarter and
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act Rules 13a-15(f). All internal
control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Under the
supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting as of
December 31, 2004 based on the framework in Internal
Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on our evaluation under the framework in
Internal Control — Integrated Framework, our
management concluded that our internal control over financial
reporting was effective as of December 31, 2004.
Our management’s assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2004 has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as
stated in their report which is included elsewhere herein.
| Item 9B. | Other Information not previously reported on Form 8-K |
None.
PART III
| Item 10. | Directors and Executive Officers of the Registrant |
The information required by this Item will be set forth in the
section headed “Proposal 1 — Election of
Directors” and the section headed “Executive
Compensation and Other Information” in our definitive Proxy
Statement to be filed with the Securities and Exchange
Commission in connection with the Annual Meeting of our
Stockholders (the “Proxy Statement”), to be held in
2005, and is incorporated in this report by reference.
We have adopted a code of ethics for directors, officers
(including our principal executive officer, principal financial
officer and principal accounting officer) and employees, known
as the Code of Ethics. The Code of Ethics is available on our
website at http://www.gen-probe.com. Stockholders may request a
free copy of the Code of Ethics from:
Gen-Probe
Incorporated
Attention:
Investor Relations
10210
Genetic Center Drive
San Diego,
CA 92121-4362
(858) 410-8000
http://www.gen-probe.com
| Item 11. | Executive Compensation |
The information required by this Item will be set forth in the
section headed “Executive Compensation and Other
Information” and the section headed “Security
Ownership of Certain Beneficial Owners and Management” in
the Proxy Statement and is incorporated in this report by
reference.
70
Table of Contents
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this Item will be set forth in the
section headed “Security Ownership of Certain Beneficial
Owners and Management” and the section headed
“Executive Compensation and Other Information” in the
Proxy Statement and is incorporated in this report by reference.
Information regarding our equity compensation plans, including
both stockholder approved plans and non-stockholder approved
plans, is set forth in Item 7 of this report, entitled
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations, Stock Options —
General option and equity compensation plan information”,
and in the section entitled “Executive
Compensation — Equity Compensation Plan
Information” in our Proxy Statement and is incorporated in
this report by reference.
| Item 13. | Certain Relationships and Related Transactions |
The information required by this Item will be set forth in the
section headed “Certain Transactions” in the Proxy
Statement and is incorporated in this report by reference.
| Item 14. | Principal Accountant Fees and Services |
The information required by this Item will be set forth in the
section headed “Independent Registered Public Accounting
Firm Fees” in the Proxy Statement, and is incorporated in
this report by reference.
PART IV
| Item 15. | Exhibits and Financial Statement Schedules |
(a) Documents filed as part of this report.
| 1. The following financial statements of Gen-Probe Incorporated and Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm, are included in this report: |
| Report of Independent Registered Public Accounting Firm | |
| Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting | |
| Consolidated balance sheets at December 31, 2004 and 2003 | |
| Consolidated statements of income for each of the three years in the period ended December 31, 2004 | |
| Consolidated statements of cash flows for each of the three years in the period ended December 31, 2004 | |
| Consolidated statements of stockholders’ equity for each of the three years in the period ended December 31, 2004 | |
| Notes to consolidated financial statements |
| 2. Schedule II — Valuation and Qualifying Accounts and Reserves for each of the three years in the period ended December 31, 2004 |
| Financial Statement schedules. All other schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or notes thereto. |
| 3. List of Exhibits required by Item 601 of Regulation S-K. See part (c) below. |
(b) Exhibits. See the Exhibit Index and
Exhibits filed as part of this report.
71
Table of Contents
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.
| By: | /s/ Henry L. Nordhoff |
|
|
|
| Henry L. Nordhoff | |
| Chairman, President and Chief Executive Officer |
Date: March 15, 2005
Pursuant to the requirements of the Securities and Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
| Signature | Title | Date | ||||
|
/s/ Henry L. Nordhoff |
Chairman, President and Chief Executive Officer (Principal Executive Officer) |
March 15, 2005 | ||||
|
/s/ Herm Rosenman |
Vice President — Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | March 15, 2005 | ||||
|
/s/ Raymond V.
Dittamore |
Director | March 15, 2005 | ||||
|
/s/ Mae C. Jemison, M.D |
Director | March 15, 2005 | ||||
|
/s/ Armin M. Kessler |
Director | March 15, 2005 | ||||
|
/s/ Gerald D.
Laubach, Ph.D. |
Director | March 15, 2005 | ||||
|
/s/ Brian A. McNamee,
M.B.B.S |
Director | March 15, 2005 | ||||
|
/s/ Phillip M.
Schneider |
Director | March 15, 2005 | ||||
|
/s/ Abraham D. Sofaer |
Director | March 15, 2005 | ||||
72
Table of Contents
GEN-PROBE INCORPORATED
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
| Page | ||||
|
Report of Independent Registered Public Accounting Firm
|
F-2 | |||
|
Report of Independent Registered Public Accounting Firm on
Internal Control over Financial Reporting
|
F-3 | |||
|
Consolidated balance sheets at December 31, 2004 and 2003
|
F-4 | |||
|
Consolidated statements of income for each of the three years in
the period ended December 31, 2004
|
F-5 | |||
|
Consolidated statements of cash flows for each of the three
years in the period ended December 31, 2004
|
F-6 | |||
|
Consolidated statements of stockholders’ equity for each of
the three years in the period ended December 31, 2004
|
F-7 | |||
|
Notes to consolidated financial statements
|
F-8 | |||
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Gen-Probe Incorporated
We have audited the accompanying consolidated balance sheets of
Gen-Probe Incorporated as of December 31, 2004 and 2003,
and the related consolidated statements of income,
stockholders’ equity and cash flows for each of the three
years in the period ended December 31, 2004. Our audits
also include the financial statement schedule listed in the
Index at Item 15(a). These financial statements and
schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Gen-Probe Incorporated at
December 31, 2004 and 2003, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2004, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Gen-Probe Incorporated’s internal control
over financial reporting as of December 31, 2004, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated February 10,
2005 expressed an unqualified opinion thereon.
| /s/ Ernst & Young LLP |
San Diego, California
February 10, 2005
F-2
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders
Gen-Probe Incorporated
We have audited management’s assessment, included in the
accompanying Management’s Report on Internal Control Over
Financial Reporting, that Gen-Probe Incorporated maintained
effective internal control over financial reporting as of
December 31, 2004, based on criteria established in
Internal Control — Integrated Framework issued by the
Committee of sponsoring organization of the Treadway Commission
(the COSO criteria). Gen-Probe Incorporated’s management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on management’s assessment and an
opinion on the effectiveness of the company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Gen-Probe
Incorporated maintained effective internal control over
financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on the COSO criteria.
Also, in our opinion, Gen-Probe Incorporated maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2004, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Gen-Probe Incorporated as of
December 31, 2004 and 2003, and the related consolidated
statements of income, stockholders’ equity and cash flows
for each of the three years in the period ended
December 31, 2004 of Gen-Probe Incorporated and our report
dated February 10, 2005 expressed an unqualified opinion
thereon.
| /s/ Ernst & Young LLP |
San Diego, California
February 10, 2005
F-3
Table of Contents
GEN-PROBE INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| December 31 | |||||||||
| 2004 | 2003 | ||||||||
|
Current assets:
|
|||||||||
|
Cash and cash equivalents
|
$ | 25,498 | $ | 35,973 | |||||
|
Short-term investments
|
168,328 | 120,333 | |||||||
|
Trade accounts receivable, net of allowance for doubtful
accounts of $664 and $717 at December 31, 2004 and 2003,
respectively
|
21,990 | 15,158 | |||||||
|
Accounts receivable — other
|
3,136 | 2,555 | |||||||
|
Inventories
|
27,308 | 13,676 | |||||||
|
Deferred income taxes
|
7,725 | 10,979 | |||||||
|
Prepaid expenses and other current assets
|
13,964 | 10,203 | |||||||
|
Total current assets
|
267,949 | 208,877 | |||||||
|
Property, plant and equipment, net
|
76,651 | 65,478 | |||||||
|
Capitalized software
|
23,466 | 24,872 | |||||||
|
Goodwill
|
18,621 | 18,621 | |||||||
|
Other assets
|
24,395 | 6,893 | |||||||
|
Total assets
|
$ | 411,082 | $ | 324,741 | |||||
|
Current liabilities:
|
|||||||||
|
Accounts payable
|
6,729 | 9,250 | |||||||
|
Accrued salaries and employee benefits
|
11,912 | 11,670 | |||||||
|
Other accrued expenses
|
4,451 | 6,085 | |||||||
|
Income tax payable
|
1,188 | 6,191 | |||||||
|
Deferred revenue
|
9,467 | 6,681 | |||||||
|
Total current liabilities
|
33,747 | 39,877 | |||||||
|
Deferred income taxes
|
9,187 | 6,850 | |||||||
|
Deferred revenue
|
5,000 | 5,667 | |||||||
|
Deferred rent
|
309 | 323 | |||||||
|
Minority interest
|
1,810 | 1,649 | |||||||
|
Commitments and contingencies
|
|||||||||
|
Stockholders’ equity:
|
|||||||||
|
Preferred stock, $.0001 par value per share;
20,000,000 shares authorized, none issued and outstanding
|
— | — | |||||||
|
Common stock, $.0001 par value per share;
200,000,000 shares authorized, 50,035,490 and
48,721,560 shares issued and outstanding at
December 31, 2004 and 2003, respectively
|
5 | 5 | |||||||
|
Additional paid-in capital
|
248,767 | 212,586 | |||||||
|
Deferred compensation
|
(1,104 | ) | (538 | ) | |||||
|
Accumulated other comprehensive income
|
807 | 343 | |||||||
|
Retained earnings
|
112,554 | 57,979 | |||||||
|
Total stockholders’ equity
|
361,029 | 270,375 | |||||||
|
Total liabilities and stockholders’ equity
|
$ | 411,082 | $ | 324,741 | |||||
See accompanying notes to consolidated financial statements.
F-4
Table of Contents
GEN-PROBE INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
| Years Ended December 31 | |||||||||||||
| 2004 | 2003 | 2002 | |||||||||||
|
Revenues:
|
|||||||||||||
|
Product sales
|
$ | 222,560 | $ | 188,645 | $ | 139,932 | |||||||
|
Collaborative research revenue
|
27,122 | 15,402 | 11,032 | ||||||||||
|
Royalty and license revenue
|
20,025 | 3,144 | 4,633 | ||||||||||
|
Total revenues
|
269,707 | 207,191 | 155,597 | ||||||||||
|
Operating expenses:
|
|||||||||||||
|
Cost of product sales
|
59,908 | 45,458 | 53,411 | ||||||||||
|
Research and development
|
68,482 | 63,565 | 47,045 | ||||||||||
|
Marketing and sales
|
27,191 | 22,586 | 18,199 | ||||||||||
|
General and administrative
|
31,628 | 23,233 | 20,995 | ||||||||||
|
Total operating expenses
|
187,209 | 154,842 | 139,650 | ||||||||||
|
Income from operations
|
82,498 | 52,349 | 15,947 | ||||||||||
|
Other income (expense):
|
|||||||||||||
|
Minority interest
|
(296 | ) | (97 | ) | — | ||||||||
|
Interest income
|
2,815 | 2,415 | 906 | ||||||||||
|
Interest expense
|
(28 | ) | (65 | ) | (1,868 | ) | |||||||
|
Other income (expense), net
|
(410 | ) | 494 | 3,238 | |||||||||
|
Total other income (expense)
|
2,081 | 2,747 | 2,276 | ||||||||||
|
Income before income taxes
|
84,579 | 55,096 | 18,223 | ||||||||||
|
Income tax expense
|
30,004 | 19,766 | 5,216 | ||||||||||
|
Net income
|
$ | 54,575 | $ | 35,330 | $ | 13,007 | |||||||
|
Net income per share
|
|||||||||||||
|
Basic
|
$ | 1.10 | $ | 0.74 | $ | 0.27 | |||||||
|
Diluted
|
$ | 1.06 | $ | 0.72 | $ | 0.27 | |||||||
|
Weighted average shares outstanding
|
|||||||||||||
|
Basic
|
49,429 | 47,974 | 47,600 | ||||||||||
|
Diluted
|
51,403 | 49,137 | 47,610 | ||||||||||
See accompanying notes to consolidated financial statements.
F-5
Table of Contents
GEN-PROBE INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Years Ended December 31 | ||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||
|
Operating activities
|
||||||||||||||
|
Net income
|
$ | 54,575 | $ | 35,330 | $ | 13,007 | ||||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||||
|
Depreciation and amortization
|
18,239 | 15,822 | 17,784 | |||||||||||
|
Stock compensation charges
|
1,142 | 149 | — | |||||||||||
|
Loss on disposal of property and equipment
|
377 | 102 | 308 | |||||||||||
|
Deferred rent
|
(14 | ) | (4 | ) | 30 | |||||||||
|
Stock option income tax benefits
|
14,035 | 4,387 | — | |||||||||||
|
Deferred revenue
|
2,119 | (1,085 | ) | 1,221 | ||||||||||
|
Deferred income taxes
|
5,567 | (2,239 | ) | 1,106 | ||||||||||
|
Minority interest
|
(13 | ) | 37 | — | ||||||||||
|
Changes in assets and liabilities:
|
||||||||||||||
|
Accounts receivable
|
(6,774 | ) | (2,164 | ) | 6,219 | |||||||||
|
Inventories
|
(13,621 | ) | (688 | ) | (753 | ) | ||||||||
|
Prepaid expenses and other current assets
|
(3,761 | ) | (5,089 | ) | (531 | ) | ||||||||
|
Accounts payable
|
(2,535 | ) | 310 | 58 | ||||||||||
|
Accrued salaries and employee benefits
|
242 | 2,710 | 1,920 | |||||||||||
|
Other accrued expenses
|
(2,329 | ) | (259 | ) | (1,059 | ) | ||||||||
|
Income tax payable
|
(4,965 | ) | 5,297 | 2,927 | ||||||||||
|
Net cash provided by operating activities
|
62,284 | 52,616 | 42,237 | |||||||||||
|
Investing activities
|
||||||||||||||
|
Proceeds from sales and maturities of short-term investments
|
159,301 | 42,722 | — | |||||||||||
|
Purchases of short-term investments
|
(206,822 | ) | (95,421 | ) | (64,842 | ) | ||||||||
|
Purchases of property, plant and equipment
|
(26,021 | ) | (12,238 | ) | (12,616 | ) | ||||||||
|
Capitalization of license fees
|
(19,026 | ) | (3,000 | ) | — | |||||||||
|
Capitalization of software development costs
|
(270 | ) | (2,070 | ) | (3,011 | ) | ||||||||
|
Capitalization of patent costs
|
(540 | ) | (635 | ) | (678 | ) | ||||||||
|
Cash paid for acquisition of Molecular Light Technology shares,
net of cash acquired
|
(376 | ) | (4,133 | ) | — | |||||||||
|
Other assets
|
42 | (12 | ) | 400 | ||||||||||
|
Net cash used in investing activities
|
(93,712 | ) | (74,787 | ) | (80,747 | ) | ||||||||
|
Financing activities
|
||||||||||||||
|
Proceeds from issuance of common stock
|
20,438 | 14,888 | — | |||||||||||
|
Principal payments on long-term debt
|
— | — | (12,000 | ) | ||||||||||
|
Capital contribution from merger with Gen-Probe Holding
|
— | — | 75,878 | |||||||||||
|
Net cash provided by financing activities
|
20,438 | 14,888 | 63,878 | |||||||||||
|
Effect of exchange rate changes on cash
|
515 | 138 | — | |||||||||||
|
Net increase (decrease) in cash and cash equivalents
|
(10,475 | ) | (7,145 | ) | 25,368 | |||||||||
|
Cash and cash equivalents at the beginning of year
|
35,973 | 43,118 | 17,750 | |||||||||||
|
Cash and cash equivalents at the end of year
|
$ | 25,498 | $ | 35,973 | $ | 43,118 | ||||||||
|
Supplemental disclosure of cash flow information:
|
||||||||||||||
|
Cash paid for:
|
||||||||||||||
|
Interest
|
$ | 34 | $ | 63 | $ | 754 | ||||||||
|
Income taxes
|
$ | 16,030 | $ | 11,913 | $ | 2,104 | ||||||||
|
Non-cash financing activities:
|
||||||||||||||
|
Contribution of non-cash items from merger with Gen-Probe Holding
|
$ | — | $ | — | $ | 10,646 | ||||||||
See accompanying notes to consolidated financial statements.
F-6
Table of Contents
GEN-PROBE INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
| Accumulated | |||||||||||||||||||||||||||||
| Common Stock | Additional | Other | Total | ||||||||||||||||||||||||||
| Paid-In | Deferred | Comprehensive | Retained | Stockholders’ | |||||||||||||||||||||||||
| Shares | Amount | Capital | Compensation | Income | Earnings | Equity | |||||||||||||||||||||||
|
Balance at December 31, 2001
|
47,600 | $ | 5 | $ | 106,100 | $ | — | $ | 60 | $ | 9,642 | $ | 115,807 | ||||||||||||||||
|
Capital contribution from merger with Gen-Probe Holding
|
— | — | 86,524 | — | — | — | 86,524 | ||||||||||||||||||||||
|
Comprehensive income:
|
|||||||||||||||||||||||||||||
|
Net income
|
— | — | — | — | — | 13,007 | 13,007 | ||||||||||||||||||||||
|
Unrealized gains on short-term investments, net of income tax
expense of $53
|
— | — | — | — | 240 | — | 240 | ||||||||||||||||||||||
|
Comprehensive income
|
13,247 | ||||||||||||||||||||||||||||
|
Balance at December 31, 2002
|
47,600 | 5 | 192,624 | — | 300 | 22,649 | 215,578 | ||||||||||||||||||||||
|
Common shares issued from exercise of stock options
|
1,083 | — | 14,301 | — | — | — | 14,301 | ||||||||||||||||||||||
|
Purchase of common shares through employee stock purchase plan
|
35 | — | 587 | — | — | — | 587 | ||||||||||||||||||||||
|
Issuance of common shares to board members
|
4 | — | 87 | — | — | — | 87 | ||||||||||||||||||||||
|
Deferred compensation related to grant of restricted stock awards
|
— | — | 600 | (600 | ) | — | — | — | |||||||||||||||||||||
|
Amortization of deferred compensation
|
— | — | — | 62 | — | — | 62 | ||||||||||||||||||||||
|
Stock option income tax benefits
|
— | — | 4,387 | — | — | — | 4,387 | ||||||||||||||||||||||
|
Comprehensive income:
|
|||||||||||||||||||||||||||||
|
Net income
|
— | — | — | — | — | 35,330 | 35,330 | ||||||||||||||||||||||
|
Unrealized gains on short-term investments, net of income tax
expense of $61
|
— | — | — | — | 43 | — | 43 | ||||||||||||||||||||||
|
Comprehensive income
|
35,373 | ||||||||||||||||||||||||||||
|
Balance at December 31, 2003
|
48,722 | 5 | 212,586 | (538 | ) | 343 | 57,979 | 270,375 | |||||||||||||||||||||
|
Common shares issued from exercise of stock options
|
1,178 | — | 16,672 | — | — | — | 16,672 | ||||||||||||||||||||||
|
Purchase of common shares through employee stock purchase plan
|
132 | — | 3,766 | — | — | — | 3,766 | ||||||||||||||||||||||
|
Issuance of common shares to board members
|
3 | — | 140 | — | — | — | 140 | ||||||||||||||||||||||
|
Deferred compensation related to grant of restricted stock awards
|
— | — | 839 | (839 | ) | — | — | — | |||||||||||||||||||||
|
Amortization of deferred compensation
|
— | — | — | 273 | — | — | 273 | ||||||||||||||||||||||
|
Stock option compensation expense for modification of stock
option awards
|
— | — | 729 | — | — | — | 729 | ||||||||||||||||||||||
|
Stock option income tax benefits
|
— | — | 14,035 | — | — | — | 14,035 | ||||||||||||||||||||||
|
Comprehensive income:
|
|||||||||||||||||||||||||||||
|
Net income
|
— | — | — | — | — | 54,575 | 54,575 | ||||||||||||||||||||||
|
Unrealized losses on short-term investments, net of income tax
benefits of $17
|
— | — | — | — | (313 | ) | — | (313 | ) | ||||||||||||||||||||
|
Foreign currency translation adjustment
|
— | — | — | — | 777 | — | 777 | ||||||||||||||||||||||
|
Comprehensive income
|
55,039 | ||||||||||||||||||||||||||||
|
Balance at December 31, 2004
|
50,035 | $ | 5 | $ | 248,767 | $ | (1,104 | ) | $ | 807 | $ | 112,554 | $ | 361,029 | |||||||||||||||
See accompanying notes to consolidated financial statements.
F-7
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 1. | Organization and summary of significant accounting policies |
| Organization |
Gen-Probe Incorporated (“Gen-Probe” or the
“Company”) is engaged in developing, manufacturing and
marketing nucleic acid probe-based products used for the
clinical diagnosis of human diseases and for screening donated
human blood. Gen-Probe’s principal customers are large
reference laboratories, public health laboratories and hospitals
located in North America, Europe and Japan.
These consolidated financial statements reflect the
Company’s historical financial results as an independent
company, separate from the Company’s former direct parent,
Gen-Probe Holding Company, Inc. (“Gen-Probe Holding”),
which was a wholly-owned subsidiary of Chugai Pharmaceutical,
Co. Ltd. (“Chugai”) of Tokyo, Japan until the spin-off
in September 2002.
In August 2003, the Company paid approximately $7.2 million
in cash to acquire an additional 65.6% of the outstanding shares
of Molecular Light Technology Limited (“MLT”), a
privately held company located in Cardiff, Wales. In August
2004, the Company paid $376,000 plus accrued interest, in cash,
to acquire an additional 3.42% of the outstanding shares, giving
the Company a total ownership of 86% when added to the amount
previously held. As such, the Company owns more than 50% and has
the ability to control the operations of this subsidiary and,
therefore, has consolidated MLT with the Company since August
2003. MLT is a biotechnology company from which Gen-Probe
licenses chemiluminescent technology it uses in its
Hybridization Protection Assay (“HPA”) and dual
kenetic assay (“DKA”). Gen-Probe is the exclusive
licensee of the MLT technology for disease testing using nucleic
acid hybridization. The acquisition was accounted for under the
purchase method of accounting in accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 141
“Business Combinations.”
The remaining interest in MLT not owned by the Company is owned
by two members of MLT’s management and has been recorded as
minority interest on the balance sheet and statement of income.
As a condition to the acquisition, the Company entered into an
option agreement which gives these individuals the option to
sell to the Company their respective interests in MLT during a
five-year period at a fixed price of approximately $958,000,
plus accrued interest. The Company has the right to accelerate
the purchase of these interests.
| Principles of consolidation |
The consolidated financial statements of the Company include the
accounts of the Company and its subsidiaries, Gen-Probe Sales
and Services, Inc., Gen-Probe Canada, Inc., Gen-Probe UK Limited
and Molecular Light Technology Limited and its subsidiaries. MLT
and its subsidiaries are consolidated into the Company’s
financial statements one month in arrears. All intercompany
transactions and balances have been eliminated in consolidation.
| Reporting periods |
The Company historically has operated and reported on fiscal
periods ending on the Friday closest to the end of the month
except for year-end, which has closed on December 31. For
ease of presentation, the quarterly reporting periods are deemed
to end on March 31, June 30 and September 30. The
fiscal years ended December 31, 2004, 2003 and 2002 each
included 52 weeks. Beginning in 2005, coinciding with the
Company’s implementation of a new Enterprise Resource
Planning system, the Company’s fiscal quarters will end on
March 31, June 30, September 30 and
December 31.
F-8
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
| Use of estimates |
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial
statements. These estimates include assessing the collectibility
of accounts receivable, valuation of inventories and long-lived
assets. Actual results could differ from those estimates.
| Foreign currencies |
The functional currency of the Company’s majority owned
subsidiaries, GPUK Limited and MLT (and its subsidiaries), is
the British pound. Accordingly, all balance sheet accounts of
these subsidiaries are translated into United States dollars
using the exchange rate in effect at the balance sheet date, and
revenues and expenses are translated using the average exchange
rates in effect during the period. The gains and losses from
foreign currency translation of these subsidiary’s
financial statements are recorded directly as a separate
component of stockholders’ equity under the caption
“Accumulated other comprehensive income.”
| Cash and cash equivalents |
Cash and cash equivalents consist primarily of highly liquid
cash investment funds with original maturities of three months
or less when acquired.
| Short-term investments |
Short-term investments are carried at fair value, with
unrealized gains and losses, net of tax, reported as a separate
component of stockholders’ equity. The amortized cost of
debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is
included in investment and interest income. Realized gains and
losses and declines in value judged to be other-than-temporary
on short-term investments are included in investment and
interest income. The cost of securities sold is based on the
specific identification method. Interest and dividends on
securities classified as available-for-sale are included in
interest income.
| Segment information |
The Company identifies its operating segments based on business
activities, management responsibility and geographical location.
For all periods presented, the Company operated in a single
business segment. Revenue by geographic location is presented in
Note 10.
| Concentration of credit risk |
The Company sells its products primarily to established large
reference laboratories, public health laboratories and
hospitals. Credit is extended based on an evaluation of the
customer’s financial condition and generally collateral is
not required.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash
equivalents, and short-term investments. The Company limits its
exposure to credit loss by placing its cash with high credit
quality financial institutions. The Company generally invests
its excess cash in mortgage-backed securities, investment-grade
corporate and municipal bonds.
| Fair value of financial instruments |
The carrying value of cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued liabilities
approximates fair value.
F-9
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
| Collectibility of accounts receivable |
The Company maintains an allowance for doubtful accounts for
estimated losses resulting from the inability of its customers
to make required payments. Credit losses historically have been
minimal and within management’s expectations. If the
financial condition of the Company’s customers were to
deteriorate, resulting in an impairment of the Company’s
ability to make payments, additional allowances would be
required.
| Stock-based compensation |
The Company records compensation expense for employee
stock-based compensation using their intrinsic value on the date
of grant pursuant to Accounting Principles Board Opinion 25
(“APB”) No. 25, “Accounting for Stock Issued
to Employees.” Under the intrinsic value method,
compensation cost for employee stock awards is recognized as the
excess, if any, of the deemed fair value for financial reporting
purposes of the Company’s common stock on the date of grant
over the amount an employee must pay to acquire the stock.
Because the Company establishes the exercise price based on the
fair market value of the Company’s stock at the date of
grant, the stock options have no intrinsic value upon grant, and
therefore no expense is recorded. Each quarter, the Company
reports the potential dilutive impact of stock options in its
diluted earnings per common share using the treasury-stock
method. Out-of-the-money stock options (i.e., the average stock
price during the period is below the strike price of the stock
option) are not included in diluted earnings per share.
As required under SFAS No. 123, “Accounting for
Stock-Based Compensation,” the pro forma effects of
stock-based compensation on net income and earnings per share
have been estimated at the date of grant using the minimum value
option pricing model from the stock option plan inception date
in 2000 through September 15, 2002 and the Black-Scholes
option-pricing model for all option grants made subsequent to
that date. The following weighted average assumptions were used:
| Stock Option Plans | ESPP | |||||||||||||||||||||||
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | |||||||||||||||||||
|
Risk-free interest rate
|
3.18 | % | 2.76 | % | 3.82 | % | 1.04 | % | 1.0 | % | — | |||||||||||||
|
Volatility
|
63 | % | 47 | % | 72 | %* | 60 | % | 54 | % | — | |||||||||||||
|
Dividend yield
|
0 | 0 | 0 | 0 | 0 | — | ||||||||||||||||||
|
Expected life (years)
|
4.0 | 4.0 | 4.0 | 0.5 | 0.2 | — | ||||||||||||||||||
|
Resulting average fair value
|
$ | 18.83 | $ | 10.78 | $ | 0.91 | $ | 5.47 | $ | 1.80 | — | |||||||||||||
| * | Amount represents the average volatility for options granted from September 16, 2002 to December 31, 2002. From January 1, 2002 to September 15, 2002, the Company assumed no volatility pursuant to the minimum value method. |
The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options that have no
restrictions and are fully transferable and negotiable in a free
trading market. The Black-Scholes model does not consider the
employment, transfer or vesting restrictions that are inherent
in the Company’s employee stock options. Use of an option
valuation model, as required by SFAS No. 123, includes
highly subjective assumptions based on long-term predictions,
including the expected stock price volatility and average life
of each stock option grant.
The fair value of each purchase right issued under the
Company’s Employee Stock Purchase Plan (“ESPP”)
for the years ended December 31, 2004 and 2003 was
estimated on the date of grant using the Black-Scholes pricing
model. The Company did not have an employee stock purchase plan
during the year ended December 31, 2002.
F-10
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Had compensation expense for stock options granted been
determined based on the fair value of the options at the date of
grant, accounting consistent with SFAS No. 123, the
Company’s net income and net income per share would have
been as follows (in thousands, except per share data):
| Years Ended December 31 | ||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||
|
Net income:
|
||||||||||||||
|
As reported
|
$ | 54,575 | $ | 35,330 | $ | 13,007 | ||||||||
|
Stock-based employee compensation expense included in reported
net income, net of related tax effects
|
590 | 37 | — | |||||||||||
|
Total stock-based employee compensation expense determined under
fair value based method for all options, net of related tax
effects
|
(10,958 | ) | (3,092 | ) | (792 | ) | ||||||||
|
Pro forma net income
|
$ | 44,207 | $ | 32,275 | $ | 12,215 | ||||||||
|
Net income per share:
|
||||||||||||||
|
As reported
|
||||||||||||||
|
Basic
|
$ | 1.10 | $ | 0.74 | $ | 0.27 | ||||||||
|
Diluted
|
$ | 1.06 | $ | 0.72 | $ | 0.27 | ||||||||
|
Pro forma
|
||||||||||||||
|
Basic
|
$ | 0.89 | $ | 0.67 | $ | 0.26 | ||||||||
|
Diluted
|
$ | 0.86 | $ | 0.66 | $ | 0.26 | ||||||||
The pro forma effects on net income for the years ended
December 31, 2004, 2003 and 2002 are not likely to be
representative of the effects on reported net income in future
years. Option valuation models require the input of highly
subjective assumptions, and changes in such subjective
assumptions can materially affect the fair value estimate of
employee stock options.
Deferred compensation for restricted stock awards issued to the
Company’s chief executive officer has been determined in
accordance with SFAS No. 123 as the fair value of the
consideration received and is being amortized to expense on a
straight-line basis over the vesting period. During the year
ended December 31, 2004, the Company recorded an
option-related non-cash compensation charge of approximately
$729,000 related to the departure of a former executive.
| Revenue recognition |
The Company records shipments of its clinical diagnostic
products as product sales when the product is shipped and title
and risk of loss has passed and when collection of the resulting
receivable is reasonably assured. Revenue from the
Company’s blood screening products shipped to countries
where regulatory approval has been received is recorded as
product sales based on a contracted transfer price with its
third-party collaboration partner, Chiron Corporation
(“Chiron”). Based on the terms of the Company’s
agreement with its collaboration partner, the Company’s
ultimate share of the net revenue from sales to the end user is
not known until reported by its collaboration partner.
The Company manufactures its blood screening products according
to Chiron’s demand specifications and transfer/shipments of
completed product to Chiron’s virtual warehouse, which
consists of various interim locations on Gen-Probe’s
premises. Upon transfer/shipment of completed product to
Chiron’s virtual warehouse, the Company bills Chiron at a
cost recovery transfer price, and Chiron remits payment in
30 days. The Company records amounts billed as deferred
revenue until shipment to Chiron’s end-customers. Customer
orders for the assay are received by Chiron and then
communicated to Company personnel who
F-11
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
fulfill the orders and ship to Chiron’s end-customers. Upon
shipment to the end-customer, the Company recognizes blood
screening product sales at the cost recovery transfer price and
records cost of products sold at the cost of the assays. Blood
screening product sales are adjusted upon the Company’s
receipt of payment from Chiron of amounts reflecting its
ultimate share of net sales by Chiron of these products, less
the cost recovery transfer price revenues previously paid.
Product sales also include the sales or rental revenue
associated with the delivery of the Company’s proprietary
instrument platforms that perform its diagnostic tests.
Generally, the Company provides its instrumentation to clinical
laboratories and hospitals without requiring them to purchase
the equipment or enter into an equipment lease. Instead, the
Company recovers the cost of providing the instrumentation in
the amounts it charges for its diagnostic assays. The Company
also has implemented multi-year sales contracts that have an
equipment factor set forth in them. The costs associated with
the instrument are charged to costs of product sales on a
straight-line basis over the estimated life of the instrument,
which ranges from three to five years; generally, three years
for luminometers and DTS 400/800 systems, and five years for
TIGRIS and DTS 800/1600 instruments. The costs to maintain these
systems in the field are charged to cost of sales as incurred.
The Company sells its instrumentation to Chiron for use in blood
screening and records these instrument sales upon delivery since
Chiron is responsible for the placement, maintenance and repair
of the units with their customers. Occasionally, the Company
sells instrumentation to its clinical diagnostics customers. The
Company records sales of these instruments as product sales upon
delivery and customer acceptance. Prior to delivery, each
instrument is extensively tested to meet Company and FDA
specifications, and is shipped fully assembled. Customer
acceptance of the Company’s instrument systems requires
installation and training by the Company’s technical
service personnel. Generally, installation is a standard process
consisting principally of uncrating, calibrating, and testing
the instrumentation.
The Company records as collaborative research revenue shipments
of its blood screening products in the United States and other
countries in which the products have not received regulatory
approval. This is done because price restrictions apply to these
products prior to FDA marketing approval in the United States
and similar approval in foreign countries. Once commercial
pricing is implemented, the Company then classifies sales of
these products as product sales in its financial statements.
The Company recognizes collaborative research revenue over the
term of various collaboration agreements as negotiated monthly
contracted amounts are earned or reimbursable costs are incurred
related to that agreement. Negotiated monthly contracted amounts
are earned in relative proportion to the performance required
under the contracts. Non-refundable license fees are recognized
over the related performance period or at the time that the
Company has satisfied all performance obligations related to the
agreement. Milestone payments are recognized as revenue upon the
achievement of specified milestones when (i) the Company
has earned the milestone payment, (ii) the milestone is
substantive in nature and the achievement of the milestone is
not reasonably assured at the inception of the agreement and
(iii) the fees are non-refundable. Any amounts received
prior to satisfying the Company’s revenue recognition
criteria are recorded as deferred revenue on the balance sheet.
Royalty revenue is recognized related to the manufacture, sale
or use of the Company’s products or technologies under
license arrangements 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.
F-12
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Cost of revenues
Cost of product sales reflects the costs applicable to products
shipped for which product sales revenue is recognized in
accordance with the Company’s revenue recognition policy.
The Company manufactures products for commercial sale as well as
development stage products for internal use or clinical
evaluation. The Company follows SFAS No. 2,
“Accounting for Research and Development Costs” in
classifying costs between cost of product sales and research and
development costs.
The Company does not separately track the total costs applicable
to collaborative research revenue as there is not a distinction
between the Company’s internal development activities and
the development efforts made pursuant to agreements with third
parties. The costs applicable to the blood screening development
collaboration are reflected in the statements of operations
under the captions “Research and development,”
“Marketing and sales” and “General and
administrative” based on the nature of the costs. The costs
incurred related to collaborative research revenue have exceeded
the amounts recorded as revenue for all periods presented.
Shipping and handling expenses
Shipping and handling expenses are included in cost of product
sales and totaled approximately $2,569,000, $2,258,000, and
$1,780,000 for the years ended December 31, 2004, 2003 and
2002, respectively.
Inventories
Inventories are stated at the lower of cost (first-in,
first-out) or market. The estimated reserve is based on
management’s review of inventories on hand compared to
estimated future usage and sales, shelf-life and assumptions
about the likelihood of obsolescence.
Patent costs
The Company capitalizes the costs incurred to file and prosecute
patent applications. The Company amortizes these costs on a
straight-line basis over the lesser of the remaining useful life
of the related technology or eight years. At December 31,
2004 and 2003, capitalized patent costs, which have been
included in “Other assets” on the consolidated balance
sheet, totaled approximately $1,243,000 and $1,691,000,
respectively, net of accumulated amortization. The Company
expenses all costs related to abandoned patent applications.
Capitalized software costs
The Company capitalizes costs incurred in the development of
computer software related products under development after
establishment of technological feasibility. These capitalized
costs are recorded at the lower of unamortized cost or net
realizable value and are amortized over the estimated life of
the related product of ten years.
F-13
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Long-lived assets
Property, plant and equipment and intangible assets with
definite useful lives are stated at cost. Depreciation of
property, plant and equipment is provided using the
straight-line method over the estimated useful lives of the
assets as follows:
| Years | ||||
|
Building
|
10-39 | |||
|
Machinery and equipment
|
3-5 | |||
|
Furniture and fixtures
|
3 | |||
Depreciation expense was $14,497,000, $14,380,000 and
$15,632,000 for the years ended December 31, 2004, 2003 and
2002, respectively. Amortization of leasehold improvements is
provided over the shorter of the remaining life of the lease or
estimated useful life of the asset. The costs of other purchased
intangibles are amortized over their estimated useful lives.
Goodwill less the amount allocated to in-process technology was
being amortized over 40 years through December 31,
2001.
Impairment of long-lived assets
The Company adopted SFAS No. 142, “Goodwill and
Other Intangible Assets,” at the beginning of 2002, which
prohibits the amortization of goodwill and intangible assets
with indefinite useful lives. SFAS No. 142 requires
that these assets be reviewed for impairment at least annually.
The Company completed its impairment test in the fourth quarter
of 2004 and determined that no impairment loss was necessary. If
the assets were considered to be impaired, the impairment charge
would be the amount by which the carrying value of the assets
exceeds the fair value of the assets.
In accordance with SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets,” if
indicators of impairment exist, the Company assesses the
recoverability of the affected long-lived assets by determining
whether the carrying value of such assets can be recovered
through undiscounted future operating cash flows. If impairment
is indicated, the Company measures the amount of such impairment
by comparing the fair value to the carrying value. There have
been no indicators of impairment through December 31, 2004.
Self-insurance reserves
The Company’s consolidated balance sheets at
December 31, 2004 and 2003 include approximately $1,402,000
and $694,000 of liabilities with respect to the portion of
employee benefit costs which are retained by the Company,
including medical costs and workers’ compensation claims.
The Company estimates the required liability of such claims on
an undiscounted basis utilizing an actuarial method that is
based upon various assumptions which include, but are not
limited to, the Company’s historical loss experience and
projected loss development factors. The required liability is
also subject to adjustment in the future based upon the changes
in claims experience, including changes in the number of
incidents (frequency) and change in the ultimate cost per
incident (severity).
Accumulated other comprehensive income
In accordance with SFAS No. 130, “Reporting
Comprehensive Income,” all components of comprehensive
income, including net income, are reported in the financial
statements in the period in which they are recognized.
Comprehensive income is defined as the change in equity during a
period from transactions and other events and circumstances from
non-owner sources. Net income and other comprehensive income,
which includes certain changes in stockholders’ equity such
as foreign currency translation of our majority owned
subsidiary’s financial statements and unrealized gains and
losses on our available-for-sale securities, are reported, net
of their related tax effect, to arrive at comprehensive income.
F-14
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Research and development
Research and development costs are expensed as incurred.
Income taxes
Through December 31, 2002, the Company was included in the
consolidated federal and in various combined state income tax
returns of its former parent company, Gen-Probe Holding, Inc.
(formerly known as Chugai Pharma U.S.A., Inc. or
“CPUSA”). Pursuant to a tax-sharing agreement with
Gen-Probe Holding, the Company was generally allocated an amount
of the consolidated tax liability equal to the tax that would
have been applicable if computed separately.
Under this agreement, any deductible amounts allocated to the
Company and not allocated back to Gen-Probe Holding were deemed
to be a capital contribution by Gen-Probe Holding at the end of
each year. In connection with the reorganization and spin-off,
Gen-Probe Holding merged into the Company and the Company
entered into a new tax-sharing agreement with CPUSA.
The tax benefit for stock options is calculated by determining
the estimated tax liability with and without stock compensation
deductions. Certain tax credits if limited by income, are
calculated using the estimated tax liability including the stock
compensation deductions in both calculations. The Company
records the difference between these two calculations to income
taxes payable and additional paid in-capital.
It is our policy to establish reserves based upon
management’s assessment of exposure for tax credits claimed
in previously filed tax returns that may become payable upon
audit by tax authorities. The tax reserves are analyzed at least
annually, generally in the fourth quarter of each year, and
adjustments are made as events occur which warrant adjustments
to the reserve.
Reclassifications
Certain prior year amounts have been reclassified to conform
with the current year presentation.
Recent accounting pronouncement
On December 16, 2004, the Financial Accounting Standards
Board (“FASB”) issued SFAS No. 123 (revised
2004), “Share-Based Payment,” which is a revision of
SFAS No. 123. SFAS No. 123(R) supersedes APB
No. 25, and amends SFAS No. 95, “Statement
of Cash Flows.” Generally, the approach in
SFAS No. 123(R) is similar to the approach described
in SFAS No. 123. However, SFAS No. 123(R)
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the statements of
income based on their fair values. Pro forma disclosure is no
longer an alternative. The Company is required to adopt
Statement 123(R) on July 1, 2005.
As permitted by SFAS No. 123, the Company currently
accounts for share-based payments to employees using APB
No. 25’s intrinsic value method and, as such,
generally recognizes no compensation cost for employee stock
options. Accordingly, the adoption of
SFAS No. 123(R)’s fair value method will have a
significant impact on the Company’s statements of income,
although it will have no impact on the Company’s overall
financial position. The impact of adoption of
SFAS No. 123(R) cannot be predicted at this time
because it will depend on levels of share-based payments granted
in the future. However, had the Company adopted
SFAS No. 123(R) in prior periods, the impact of that
standard would have approximated the impact of
SFAS No. 123 as described in the disclosure of pro
forma net income and earnings per share in Note 1 to the
consolidated financial statements. SFAS No. 123(R)
also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash
flow, rather than as an operating cash flow as required under
current literature. This requirement will reduce net operating
cash flows and increase net financing cash flows in periods
after adoption. While the Company cannot estimate what those
amounts will
F-15
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
be in the future (because they depend on, among other things,
when employees exercise stock options), the amount of operating
cash flows recognized in prior periods for such excess tax
deductions were $14,035,000, $4,387,000, and $0 for the years
ended December 31, 2004, 2003 and 2002, respectively.
Net income per share
The Company computes net income per share in accordance with
SFAS No. 128, “Earnings Per Share,” and SEC
Staff Accounting Bulletin (“SAB”) No. 98. Under
the provisions of SFAS No. 128, basic net income per
share is computed by dividing the net income for the period by
the weighted average number of common shares outstanding during
the period. Diluted net income per share is computed by dividing
the net income for the period by the weighted average number of
common and common equivalent shares outstanding during the
period.
Under the provisions of SAB No. 98, common shares
issued for nominal consideration, if any, would be included in
the per share calculations as if they were outstanding for all
periods presented. The Company considers common equivalent
shares from the exercise of stock options in the instance where
the shares are dilutive to net income of the Company by
application of the treasury stock method.
The following table sets forth the computation of net income per
share (in thousands, except per share amounts):
| December 31 | |||||||||||||
| 2004 | 2003 | 2002 | |||||||||||
|
Net income
|
$ | 54,575 | $ | 35,330 | $ | 13,007 | |||||||
|
Weighted average shares outstanding — Basic
|
49,429 | 47,974 | 47,600 | ||||||||||
|
Effect of dilutive common stock options outstanding
|
1,974 | 1,163 | 10 | ||||||||||
|
Weighted average shares outstanding — Diluted
|
51,403 | 49,137 | 47,610 | ||||||||||
|
Net income per share:
|
|||||||||||||
|
Basic
|
$ | 1.10 | $ | 0.74 | $ | 0.27 | |||||||
|
Diluted
|
$ | 1.06 | $ | 0.72 | $ | 0.27 | |||||||
Dilutive securities include common stock options subject to
vesting. Potentially dilutive securities totaling 244,296,
1,470,911 and 2,349,192 for the years ended December 31,
2004, 2003 and 2002, respectively were excluded from the
calculation of diluted earnings per share because of their
anti-dilutive effect.
| 2. | Balance sheet information |
The following tables provide details of selected balance sheet
items (in thousands):
Inventories
| December 31 | ||||||||
| 2004 | 2003 | |||||||
|
Raw materials and supplies
|
$ | 5,345 | $ | 5,874 | ||||
|
Work in process
|
10,429 | 3,118 | ||||||
|
Finished goods
|
11,534 | 4,684 | ||||||
| $ | 27,308 | $ | 13,676 | |||||
F-16
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Property, plant and equipment
| December 31 | ||||||||
| 2004 | 2003 | |||||||
|
Land
|
$ | 9,100 | $ | 9,100 | ||||
|
Building
|
40,593 | 40,534 | ||||||
|
Machinery and equipment
|
93,337 | 86,717 | ||||||
|
Leasehold improvements
|
15,907 | 17,181 | ||||||
|
Furniture and fixtures
|
9,874 | 9,393 | ||||||
|
Construction in-progress
|
8,775 | 2,149 | ||||||
|
Property, plant and equipment (at cost)
|
177,586 | 165,074 | ||||||
|
Less accumulated depreciation and amortization
|
(100,935 | ) | (99,596 | ) | ||||
|
Property, plant and equipment (net)
|
$ | 76,651 | $ | 65,478 | ||||
Other assets
| December 31 | ||||||||
| 2004 | 2003 | |||||||
|
Patents and other intangible assets
|
$ | 15,305 | $ | 14,764 | ||||
|
Purchased intangible assets
|
33,636 | 33,636 | ||||||
|
License fees
|
22,026 | 3,000 | ||||||
|
Other
|
236 | 260 | ||||||
| 71,203 | 51,660 | |||||||
|
Less accumulated amortization
|
(46,808 | ) | (44,767 | ) | ||||
| $ | 24,395 | $ | 6,893 | |||||
As of December 31, 2004, the Company has capitalized
$23,466,000, net in software costs associated with the
development of the TIGRIS instrument. In addition, the Company
has an aggregate of $16,910,000 in TIGRIS-related items
consisting of inventories, machinery and equipment and prepaid
expenses.
| 3. | Short-term investments |
The following is a summary of short-term investments as of
December 31, 2004 (in thousands):
| Gross | Gross | |||||||||||||||
| Unrealized | Unrealized | Estimated | ||||||||||||||
| Cost | Gains | Losses | Fair Value | |||||||||||||
|
Corporate obligations
|
$ | 4,021 | $ | — | $ | (5 | ) | $ | 4,016 | |||||||
|
Mortgage backed government securities
|
2,035 | — | (16 | ) | 2,019 | |||||||||||
|
Municipal securities
|
162,234 | 391 | (332 | ) | 162,293 | |||||||||||
|
Total short-term investments
|
$ | 168,290 | $ | 391 | $ | (353 | ) | $ | 168,328 | |||||||
F-17
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The amortized cost and estimated fair value of
available-for-sale marketable securities as of December 31,
2004, by contractual maturity, are as follows (in thousands):
| Gross | Gross | ||||||||||||||||
| Unrealized | Unrealized | Estimated | |||||||||||||||
| Cost | Gains | Losses | Fair Value | ||||||||||||||
|
Maturities
|
|||||||||||||||||
|
Within one year
|
$ | 50,139 | $ | — | $ | (150 | ) | $ | 49,989 | ||||||||
|
After one year through five years
|
118,151 | 391 | (203 | ) | 118,339 | ||||||||||||
|
Total short-term investments
|
$ | 168,290 | $ | 391 | $ | (353 | ) | $ | 168,328 | ||||||||
The following is a summary of short-term investments as of
December 31, 2003 (in thousands):
| Gross | Gross | |||||||||||||||
| Unrealized | Unrealized | Estimated | ||||||||||||||
| Cost | Gains | Losses | Fair Value | |||||||||||||
|
Corporate obligations
|
$ | 18,745 | $ | 122 | $ | — | $ | 18,867 | ||||||||
|
Mortgage backed government securities
|
41,909 | 72 | (1 | ) | 41,980 | |||||||||||
|
Municipal securities
|
59,327 | 171 | (12 | ) | 59,486 | |||||||||||
|
Total short-term investments
|
$ | 119,981 | $ | 365 | $ | (13 | ) | $ | 120,333 | |||||||
Gross realized gains from the sales of short-term investments
were $402,000 for the year ended December 31, 2004. Gross
realized losses from the sales of short-term investments were
$693,000 for the year ended December 31, 2004. Realized
gains and losses were not significant for the years ended
December 31, 2003 and 2002.
| 4. | Intangible assets by asset class and related accumulated amortization |
The Company’s intangible assets and related accumulated
amortization consisted of the following (in thousands):
| December 31 | ||||||||||||||||||||||||
| 2004 | 2003 | |||||||||||||||||||||||
| Accumulated | Accumulated | |||||||||||||||||||||||
| Gross | Amortization | Net | Gross | Amortization | Net | |||||||||||||||||||
|
Intangible assets subject to amortization:
|
||||||||||||||||||||||||
|
Capitalized software
|
$ | 25,142 | $ | 1,676 | $ | 23,466 | $ | 24,872 | $ | — | $ | 24,872 | ||||||||||||
|
Patents
|
15,305 | 14,062 | 1,243 | 14,764 | 13,073 | 1,691 | ||||||||||||||||||
|
Purchased intangible assets
|
33,636 | 31,994 | 1,642 | 33,636 | 31,658 | 1,978 | ||||||||||||||||||
|
License fees
|
22,026 | 752 | 21,274 | 3,000 | 36 | 2,964 | ||||||||||||||||||
|
Total
|
$ | 96,109 | $ | 48,484 | $ | 47,625 | $ | 76,272 | $ | 44,767 | $ | 31,505 | ||||||||||||
|
Goodwill
|
$ | 26,298 | $ | 7,677 | $ | 18,621 | $ | 26,298 | $ | 7,677 | $ | 18,621 | ||||||||||||
In September 2004, the Company entered into a Settlement
Agreement and an Amendment to its Non-exclusive License
Agreement with Vysis Inc. (“Vysis”) under which the
Company has withdrawn its patent litigation against Vysis and
agreed to pay Vysis an aggregate of $22,500,000. This aggregate
amount includes
F-18
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
$20,500,000 for a fully paid up license to eliminate all future
royalty obligations of the Company to Vysis under the Collins
patent covered by the license, and $2,000,000 for a fully
paid-up, royalty-free license in additional fields covered by
the Collins patent. The license now covers current and future
products in the field of infectious diseases as well as
potential products in all other fields. Chiron, the
Company’s blood screening partner has reimbursed the
Company $5,474,000 of the $20,500,000 allocated to the cost of
the fully paid-up license for the current field, commensurate
with its obligation to reimburse the Company a portion of the
royalties paid by the Company to Vysis on blood screening
products. The Company capitalized the $17,026,000 net
payment ($22,500,000 less Chiron’s $5,474,000
reimbursement) as an intangible asset which is being amortized
to cost of goods sold over the patent’s remaining economic
life of 135 months.
The Company had aggregate amortization expense of $3,717,000,
$1,442,000 and $2,194,000 for the years ended December 31,
2004, 2003 and 2002, respectively.
The expected future annual amortization expense of the
Company’s intangible assets is as follows (in thousands):
| Amortization | ||||||
| Expense | ||||||
| Years Ended December 31 | ||||||
|
2005
|
$ | 5,969 | ||||
|
2006
|
5,086 | |||||
|
2007
|
4,834 | |||||
|
2008
|
4,729 | |||||
|
2009
|
4,675 | |||||
|
Thereafter
|
22,332 | |||||
|
Total
|
$ | 47,625 | ||||
| 5. | Long-term debt |
In 1997, the Company issued $14,000,000 of notes payable to a
bank and an insurance company. The notes bore interest at 7.68%,
with interest payable through December 31, 2000, then
principal and interest through May 2007.
In September 2002, in connection with the Company’s
spin-off from Chugai, the Company repaid in full the remaining
$10,000,000 of principal due on the notes, the accrued interest
due and a prepayment premium of approximately $1,200,000. The
prepayment premium and the remaining deferred financing fees
associated with the notes totaled $1,250,000 and were previously
recorded as a $750,000 extraordinary loss ($1,250,000 charge,
net of a $500,000 tax benefit) in the consolidated financial
statements. The Company adopted SFAS No. 145 in 2003
and reclassified the prepayment premium and the deferred
financing fees associated with the early pay-off of debt
recorded in the third quarter of 2002, from an extraordinary
loss to interest expense on the statement of income. The tax
benefit has been reflected as a component of income tax expense.
The reported net income did not change.
The Company has secured a bank line of credit agreement, which
expires in July 2005, under which the Company may borrow up to
$10,000,000 at the bank’s prime rate, or at LIBOR plus 1%.
The line of credit is secured by the assets of the Company other
than real property. At December 31, 2004, the Company did
not have any amounts outstanding under the line. The line of
credit agreement requires the Company to comply with various
financial covenants. Financial covenants include requirements as
to tangible net worth, liabilities as a percentage of tangible
net worth, the ratio of current assets to current liabilities,
required minimum levels of earnings before interest, taxes,
depreciation and amortization, and the ratio of funded debt to
earnings
F-19
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
before interest, taxes, depreciation and amortization. The
Company was in compliance with all covenants at
December 31, 2004.
| 6. | Related party transactions |
The Company recorded royalty expense to MLT of $1,451,000 and
$2,467,000 for the years ended December 31, 2003 and 2002,
respectively, prior to the Company’s acquisition of a
majority ownership interest in MLT in August 2003. All royalty
expense incurred by the Company subsequent to the acquisition
has been eliminated in the consolidated financial statements.
| 7. | Income taxes |
The provision for income taxes consists of the following (in
thousands):
| Years Ended December 31 | |||||||||||||
| 2004 | 2003 | 2002 | |||||||||||
|
Current:
|
|||||||||||||
|
Federal
|
$ | 22,499 | $ | 20,316 | $ | 3,788 | |||||||
|
International
|
202 | 500 | 127 | ||||||||||
|
State
|
1,589 | 1,264 | 238 | ||||||||||
| 24,290 | 22,080 | 4,153 | |||||||||||
|
Deferred:
|
|||||||||||||
|
Federal
|
3,389 | (3,443 | ) | 1,524 | |||||||||
|
International
|
(114 | ) | 219 | — | |||||||||
|
State
|
2,439 | 910 | (461 | ) | |||||||||
| 5,714 | (2,314 | ) | 1,063 | ||||||||||
| $ | 30,004 | $ | 19,766 | $ | 5,216 | ||||||||
The provision for income taxes varies from the amount computed
by applying the federal statutory rate to income before income
taxes due to the nondeductibility of the amortization of
goodwill and certain other intangible assets for tax reporting
purposes, less certain tax credits realized and tax exempt
foreign income.
The Company has not provided for United States income taxes on
foreign subsidiaries undistributed earnings of approximately
$6,000,000 at December 31, 2004, which are expected to be
reinvested indefinitely outside the United States. It is not
possible to predict the amount of United States income taxes
that might be payable if these earnings were eventually
repatriated.
F-20
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Significant components of the Company’s deferred tax assets
and liabilities for federal and state income taxes are as
follows (in thousands):
| December 31 | |||||||||
| 2004 | 2003 | ||||||||
|
Deferred tax assets:
|
|||||||||
|
Research and California manufacturers’ investment credit
carryforwards
|
$ | 3,025 | $ | 4,457 | |||||
|
Inventory reserves and capitalization
|
5,075 | 8,333 | |||||||
|
Allowance for doubtful accounts
|
280 | 302 | |||||||
|
Deferred revenue
|
2,238 | 2,498 | |||||||
|
Depreciation
|
— | 376 | |||||||
|
Other accruals and reserves (net)
|
2,021 | 1,932 | |||||||
|
Total deferred tax assets
|
12,639 | 17,898 | |||||||
|
Valuation allowance
|
(3,019 | ) | (2,847 | ) | |||||
|
Total net deferred tax assets
|
9,620 | 15,051 | |||||||
|
Deferred tax liabilities:
|
|||||||||
|
Purchased intangibles
|
(638 | ) | (769 | ) | |||||
|
Capitalized costs expensed for tax purposes
|
(8,927 | ) | (10,153 | ) | |||||
|
Depreciation
|
(1,517 | ) | — | ||||||
|
Total net deferred tax liabilities
|
(11,082 | ) | (10,922 | ) | |||||
|
Net deferred tax assets (liabilities)
|
$ | (1,462 | ) | $ | 4,129 | ||||
In connection with the merger of Gen-Probe Holding into
Gen-Probe, the Company recorded approximately $2,847,000 of
deferred tax assets. These deferred tax assets relate
principally to financial statement depreciation in excess of
that deducted for tax purposes and to research and development
tax credits previously held by CPUSA, the successor to the
Company’s sister company, Chugai Biopharmaceuticals, Inc.,
which have been included in the combined tax returns of the
Company. These deferred tax assets are being carried forward and
may be realized in future periods depending on, among other
factors, the Company’s having sufficient taxable income in
the future periods. The deferred tax assets recorded are fully
offset by a valuation reserve until these deductions and credits
are realized.
The Company has also recorded a deferred tax asset of
approximately $172,000 for foreign tax credits, which has been
fully offset by a valuation reserve until the Company determines
that it will be able to claim the credits. Other than the
valuation allowance for the net deferred tax assets from CPUSA
and the foreign tax credit, no additional valuation allowance
has been recorded to offset deferred tax assets as the Company
has determined that it is more likely than not that such assets
will be realized. The Company will continue to assess the
likelihood of realization of such assets; however, if future
events occur which do not make the realization of such assets
more likely than not, the Company will record a valuation
allowance against all or a portion of the net deferred tax
assets.
At December 31, 2004, the Company also had California
research and development credit carryforwards of approximately
$3,716,000, which do not expire. In accordance with the Internal
Revenue Code, the Company’s use of its credit carryforwards
could be limited in the event of certain cumulative changes in
the Company’s stock ownership.
F-21
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The provision for income taxes reconciles to the amount computed
by applying the federal statutory rate to income before taxes as
follows (in thousands):
| Years Ended December 31 | ||||||||||||||||||||||||
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | |||||||||||||||||||
|
Expected income tax provision at federal statutory rate
|
$ | 29,603 | $ | 19,305 | $ | 6,378 | 35 | % | 35 | % | 35 | % | ||||||||||||
|
State income tax provision, net of federal benefit
|
3,653 | 2,356 | 723 | 4 | % | 5 | % | 4 | % | |||||||||||||||
|
Federal tax credit
|
(1,500 | ) | (1,500 | ) | (1,000 | ) | (2 | )% | (3 | )% | (5 | )% | ||||||||||||
|
State tax credits
|
(975 | ) | (943 | ) | (943 | ) | (1 | )% | (2 | )% | (5 | )% | ||||||||||||
|
Other
|
(777 | ) | 548 | 58 | (1 | )% | 1 | % | — | % | ||||||||||||||
|
Actual income tax provision
|
$ | 30,004 | $ | 19,766 | $ | 5,216 | 35 | % | 36 | % | 29 | % | ||||||||||||
Tax benefits of $14,035,000 and $4,387,000 for the years ended
December 31, 2004 and 2003 related to employee stock
options and the Company’s employee stock purchase plan were
credited to stockholders’ equity.
| 8. | Stockholders’ equity |
On May 28, 2004, the Company’s stockholders approved
an increase in the authorized number of shares of common stock
under the Company’s Certificate of Incorporation from
100,000,000 to 200,000,000 shares.
The merger of Gen-Probe Holding into Gen-Probe on July 23,
2002 was reflected as a reorganization of entities under common
control and the assets and liabilities were recorded at the
historical book value at the merger date. Gen-Probe did not
issue additional shares of its common stock in excess of the
number of shares previously owned by Gen-Probe Holding to Chugai
in consideration for the net assets acquired. Instead, Gen-Probe
adjusted all outstanding options to purchase its common stock
granted under its 2000 Equity Participation Plan. The number of
shares subject to each option was reduced by approximately 17.6%
to recognize the contribution of the net assets to Gen-Probe
through the merger of Gen-Probe Holding into Gen-Probe. Although
the adjustment resulted in a reduction in option holders’
aggregate ownership stake in Gen-Probe relative to Chugai’s
ownership stake, the reduction was in proportion to the
reduction that would have resulted from the issuance by
Gen-Probe of additional shares of Gen-Probe common stock to
Chugai in connection with the merger had such shares actually
been issued. The results of operations of Gen-Probe Holding are
included in the accompanying consolidated financial statements
beginning on July 23, 2002.
The net assets from Gen-Probe Holding acquired were as follows
(in thousands):
|
Cash and cash equivalents
|
$ | 75,878 | ||
|
Land and land improvements
|
9,100 | |||
|
Goodwill
|
1,397 | |||
|
Other assets, net
|
149 | |||
|
Net assets acquired
|
$ | 86,524 | ||
Gen-Probe’s lease of the land on which its headquarters is
located terminated automatically upon the completion of the
merger on July 23, 2002 because Gen-Probe now owns the land.
F-22
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
On September 16, 2002, the Company adopted a stockholder
rights plan that could discourage, delay or prevent an
acquisition of the Company under certain circumstances. The plan
was amended by the Board of Directors on November 20, 2003.
The rights plan provides for preferred stock purchase rights
attached to each share of our common stock, which will cause
substantial dilution to a person or group acquiring 15% or more
of our stock if the acquisition is not approved by our Board of
Directors. In connection with the rights plan, the Company
declared a dividend of one preferred share purchase right for
each outstanding share of common stock of the Company
outstanding at the close of business on September 26, 2002,
which automatically adjusted to one-half of a right as a result
of the 100% stock dividend paid by the Company on
September 30, 2003. Under the terms of the rights plan, the
rights would become exercisable on the tenth day following the
acquisition by a person or group of 15% or more of
Gen-Probe’s common stock, or commencement of a tender offer
for Gen-Probe’s common stock that would result in the
ownership of 15% or more of the Company’s common stock by
one person or group. Each right will initially represent the
right, under certain circumstances, to purchase 1/100 of a
share of newly created Series A Junior Participating
Preferred Stock of the Company at an exercise price of $300. The
exercise price is subject to adjustment by the Company. The
Board of Directors may terminate the rights plan or redeem the
rights at the redemption price of $0.01 per right, subject
to adjustment, at any time prior to the earlier of
September 26, 2012, the expiration date of the rights, or
the date of distribution of the rights, as determined under the
rights plan. The rights plan has a term of 10 years. The
initial distribution of rights is expected to be non-dilutive
and non-taxable to stockholders for United States federal income
tax purposes.
In each of June 2004 and August 2003, the Company granted
20,000 shares of restricted stock units to its chief
executive officer under The 2003 Incentive Award Plan of
Gen-Probe Incorporated (the “2003 Plan”), resulting in
deferred compensation of $839,000 and $600,000, respectively,
associated with these grants. The deferred compensation is being
amortized to expense over the vesting period (48 months) of
the restricted stock units. The Company also issued 3,660 and
3,718 shares of common stock under the 2003 Plan during the
years ended December 31, 2004 and 2003, to members of the
Board of Directors as partial consideration for services
rendered, resulting in an expense totaling $140,663 and $86,710,
respectively, which was equal to the fair market value on the
date of grants.
Stock options
The Company adopted the 2003 Plan in May 2003 that provides for
the issuance of up to 5,000,000 shares of common stock for
grants under the 2003 Plan. The Plan provides for incentives for
officers, directors, employees and consultants through the
granting of incentive and nonstatutory stock options, restricted
stock and stock appreciation rights. The exercise price of each
option granted under the 2003 Plan must be equal to or greater
than the fair market value of the Company’s stock on the
date of grant. The Board of Directors may determine the terms
and vesting of all options and other awards granted under the
2003 Plan; however, in no event will the option term exceed
10 years. Generally, options granted under the 2003 Plan
will vest at the rate of 25% or 33% one year from the grant date
and 1/48 or 1/36, respectively, each month thereafter until the
options are fully vested.
The Company adopted the 2002 New Hire Stock Option Plan (the
“2002 Plan”) in November 2002 that provides for the
issuance of up to 400,000 shares of common stock for grants
under the 2002 Plan. The 2002 Plan provides for the grant of
non-statutory stock options only, with exercise price, option
term and vesting terms generally the same as those under the
2000 Plan described below. Options may only be granted under the
2002 Plan to newly hired employees of the Company.
The Company adopted the 2000 Equity Participation Plan (the
“2000 Plan”) in August 2000 that provides for the
issuance of up to 4,827,946 shares of common stock for
grants under the 2000 Plan. The 2000 Plan provides for the grant
of incentive and nonstatutory stock options. The exercise price
of each option granted under the 2000 Plan must be equal to or
greater than the fair market value of the Company’s stock on
F-23
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
the date of grant. The Board of Directors may determine the
terms and vesting of all options; however, in no event will the
contractual term exceed 10 years. Generally, options vest
25% or 33% one year from the grant date and 1/48 or 1/36,
respectively, each month thereafter until the options are fully
vested. All share amounts presented below for the 2000 Plan have
been adjusted to reflect the reduction by approximately 17.6%
for the contribution of cash and land to Gen-Probe through the
merger of Gen-Probe Holding into Gen-Probe in July 2002.
A summary of the Company’s stock option activity for all
Plans is as follows:
| Number of | Weighted Average | ||||||||
| Shares | Exercise Price | ||||||||
|
Outstanding at December 31, 2001
|
3,604,116 | $ | 13.36 | ||||||
|
Granted
|
1,618,998 | 12.12 | |||||||
|
Exercised
|
— | — | |||||||
|
Cancelled
|
(545,022 | ) | 13.39 | ||||||
|
Outstanding at December 31, 2002
|
4,678,092 | 12.93 | |||||||
|
Granted
|
2,043,932 | 27.19 | |||||||
|
Exercised
|
(1,083,238 | ) | 13.20 | ||||||
|
Cancelled
|
(166,266 | ) | 16.34 | ||||||
|
Outstanding at December 31, 2003
|
5,472,520 | 18.10 | |||||||
|
Granted
|
2,061,329 | 37.21 | |||||||
|
Exercised
|
(1,178,052 | ) | 14.15 | ||||||
|
Cancelled
|
(351,743 | ) | 24.97 | ||||||
|
Outstanding at December 31, 2004
|
6,004,054 | $ | 25.03 | ||||||
The following table summarizes information about stock options
outstanding at December 31, 2004:
| Options Outstanding | |||||||||||||||||||||
| Options Exercisable | |||||||||||||||||||||
| Weighted | |||||||||||||||||||||
| Average | Weighted | Weighted | |||||||||||||||||||
| Remaining | Average | Average | |||||||||||||||||||
| Shares | Contractual | Exercise | Shares | Exercise | |||||||||||||||||
| Outstanding | Life (Years) | Price | Exercisable | Price | |||||||||||||||||
|
Range of Exercise Prices
|
|||||||||||||||||||||
|
$ 6.75 - $12.29
|
1,262,504 | 7.2 | $ | 11.81 | 658,840 | $ | 11.72 | ||||||||||||||
|
$13.50 - $15.51
|
1,211,828 | 6.0 | 13.70 | 1,040,870 | 13.67 | ||||||||||||||||
|
$19.19 - $29.53
|
1,327,779 | 8.6 | 28.47 | 429,393 | 28.31 | ||||||||||||||||
|
$30.68 - $36.47
|
564,198 | 9.0 | 33.87 | 49,297 | 32.26 | ||||||||||||||||
|
$36.59
|
1,196,000 | 9.6 | 36.59 | — | — | ||||||||||||||||
|
$37.42 - $47.32
|
441,745 | 9.4 | 41.03 | 29,994 | 41.94 | ||||||||||||||||
| 6,004,054 | 8.1 | $ | 25.03 | 2,208,394 | $ | 16.73 | |||||||||||||||
Shares of common stock available for future grants under all
stock option plans were 1,915,224 at December 31, 2004.
F-24
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The weighted-average grant-date fair value per share of options
granted during the periods were as follows:
| Years Ended December 31 | |||||||||||||
| 2004 | 2003 | 2002 | |||||||||||
|
Exercise price equal to the fair value of common stock on the
grant date:
|
|||||||||||||
|
Weighted-average exercise price
|
$ | 37.21 | $ | 27.19 | $ | 8.68 | |||||||
|
Weighted-average option fair value
|
$ | 18.83 | $ | 10.78 | $ | 4.41 | |||||||
|
Exercise price greater than deemed fair value of common stock on
the grant date:
|
|||||||||||||
|
Weighted-average exercise price
|
$ | — | $ | — | $ | 12.66 | |||||||
|
Weighted-average option fair value
|
$ | — | $ | — | $ | 0.17 | |||||||
Employee stock purchase plan
In May 2003, the Company adopted the ESPP that provides for the
issuance of up to 1,000,000 shares of the Company’s
common stock, as adjusted to reflect the Stock Split. The ESPP
is intended to qualify under Section 423 of the Internal
Revenue Code and is for the benefit of qualifying employees as
designated by the Board of Directors. Under the terms of the
ESPP, purchases are made semiannually. Participating employees
may elect to have a maximum of 15% of their compensation, up to
a maximum of $21,250 per calendar year, withheld through
payroll deductions to purchase shares of common stock under the
ESPP. The purchase price of the common stock purchased under the
ESPP is equal to 85% of the fair market value of the common
stock on the offering or “Grant Date” or the exercise
or purchase date, whichever is lower. During the years ended
December 31, 2004 and 2003, employees purchased 132,218 and
34,714 shares at an average price of $28.49 and
$16.91 per share, respectively. As of December 31,
2004, 833,068 shares were reserved for future issuances
under the ESPP.
| 9. | Commitments and contingencies |
Lease commitments
The Company leases certain facilities under operating leases
which expire at various dates through February 2008.
Future minimum payments under operating leases as of
December 31, 2004 are as follows (in thousands):
|
2005
|
$ | 2,422 | ||
|
2006
|
1,762 | |||
|
2007
|
765 | |||
|
2008
|
96 | |||
|
Total payments
|
$ | 5,045 | ||
Rent expense was $2,626,000, $1,700,000 and $1,727,000 for the
years ended December 31, 2004, 2003 and 2002, respectively.
F-25
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Collaborative agreements
Effective May 2, 1997, the Company entered into agreements
which created a worldwide relationship between Gen-Probe and
bioMérieux Vitek, Inc. (“bMx”). The collaboration
involved research and development activities, as well as the
transfer to bMx of product distribution rights in international
markets, excluding Japan. As part of the agreements, Gen-Probe
has licensed its probe-related technology to bMx to jointly
develop probe assays and adapt and develop instrumentation
during a five-year and ten-year term. In August 2000, the bMx
agreement was amended to transition the relationship from a
collaborative arrangement to a licensing agreement with certain
performance obligations. In exchange for the royalties paid
under the original agreement, Gen-Probe transferred all
information and know-how to bMx as of December 31, 2000.
Additionally, the Company transferred all products, work
instructions, formulations and necessary materials needed for
manufacturing key biochemistry components under the agreements
to bMx by January 1, 2003, except that we continued to
manufacture two enzyme formulations through July 15, 2003.
Gen-Probe records revenue under this arrangement when specific
milestones are achieved. Gen-Probe recognized milestone revenue
of $1,250,000 for the year ended December 31, 2002. In
addition, the Company recognized $1,870,000 in license fees
related to this agreement for the year ended December 31,
2002. During the years ended December 31, 2004 and 2003,
Gen-Probe recognized $600,000 and $750,000 in minimum annual
royalties, respectively.
In September 2004, the Company signed non-exclusive licensing
agreements with bioMérieux and its affiliates that provide
bioMérieux options to access the Company’s ribosomal
RNA technologies for certain uses, and that give the Company
access to bioMérieux’s intellectual property for
detecting genetic mutations that predispose people to blood
clotting disorders. Under the terms of the agreements,
bioMérieux paid the Company $250,000 for limited
non-exclusive research licenses and options to develop products
for certain targets using our patented ribosomal RNA
technologies. BioMérieux also terminated its license
agreements with the Company relating to the development of
assays for bioMérieux’s VIDAS instrument. Further, the
Company obtained from bioMérieux a non-exclusive, worldwide
license to use bioMérieux’s intellectual property to
develop tests that detect mutations in the genes that code for
factor V and prothrombin, proteins that control the blood
clotting process. The Company will also pay bioMérieux
royalties on the sale of any products developed using
bioMérieux’s intellectual property. In connection with
the VIDAS termination and the license of factor V and
prothrombin rights, the Company recorded net revenue of
$100,000. The amount of revenue that Gen-Probe will record in
the future related to these non-exclusive licensing agreements
will depend on the number of targets selected by bioMérieux.
In July 1998, the Company entered into an agreement with Chiron
Corporation (“Chiron”) to form a strategic alliance to
develop, manufacture and market nucleic acid probe assay systems
for blood screening and certain areas of clinical diagnostics.
Under the terms of the agreement, Chiron or a third party will
market and sell products that utilize Chiron’s intellectual
property relating to hepatitis C virus (“HCV”)
and human immune deficiency virus Type 1 (“HIV-1”) and
the Company’s patented technologies. The Company received
an up-front license fee of $10,000,000 from Chiron in 1998,
which the Company recorded as deferred revenue and is being
recognized as license revenue over a 10-year term. In September
1998, Chiron agreed to sell its diagnostic business to Bayer. As
a result, the Company and Bayer have aligned under the terms of
the agreement relating to clinical diagnostics. The Company
recorded licensing revenues of approximately $670,000 from
Chiron for each of the years ended December 31, 2004, 2003
and 2002, respectively, related to this aspect of the agreement.
In January 2004, the Company began United States clinical trials
of the Procleix Ultrio assay on the fully automated,
high-throughput TIGRIS instrument systems triggering a
$6,500,000 contract milestone payment under the agreement which
the Company recorded as license revenue. The Company may receive
an additional $10,000,000 contract milestone payment upon
Federal Drug Administration (“FDA”) approval of the
Procleix Ultrio assay.
F-26
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
In connection with its collaboration agreement with Chiron, the
Company developed and supplied products to the American Red
Cross, America’s Blood Centers, American Independent Blood
Centers, the United States military and others for pooled blood
sampling under the terms of an Investigational New Drug
(“IND”). The Company received monthly payments for
costs that were incurred for development of the product. The
contracts terminated upon commercial release of the product in
the United States in 2002. Collaborative research revenue
recorded under the terms of the agreements for the year ended
December 31, 2002 was $7,100,0000. The Company does not
separately track the costs applicable to the blood screening
development collaboration with Chiron and therefore is not able
to quantify the direct costs associated with the collaborative
research revenue. The Company believes that the costs incurred
related to the collaborative research revenue have exceeded the
amounts recorded as revenue in all periods presented. In
addition, for the years ended December 31, 2004 and 2003,
the Company recognized $18,543,000 and $5,962,000 in
collaborative research revenue through its collaboration with
Chiron from deliveries of West Nile virus (“WNV”)
tests on a “cost recovery” basis. The Company expects
to continue recognizing these sales as collaborative research
revenue until such time as FDA approval has been received.
The Company is currently developing the Procleix Ultrio assay, a
nucleic acid test (“NAT”) assay to detect HIV-1, HCV
and hepatitis B virus (“HBV”), in donated human blood.
Gen-Probe develops these assays through its collaboration with
Chiron. In March 2003, the Company signed a definitive written
agreement with Chiron for the development and commercialization
of the Procleix Ultrio assay. During the years ended
December 31, 2004 and 2003, the Company received $2,766,000
and $3,932,000, respectively, in reimbursements for expenses
incurred related to the development of the Procleix Ultrio assay
from Chiron. The Procleix Ultrio assay, and the discriminatory
assays that will be used in conjunction with it, will be
marketed by Chiron under the tradename Procleix Ultrio assay. In
January 2004, the Company commenced clinical trials of the
Procleix Ultrio assay in the United States on its TIGRIS
instrument. In September 2004, the Company filed a Biologics
License Application (“BLA”) with the FDA for this
assay. The Company has also developed a NAT assay to detect WNV,
which is currently being used in clinical trials under an IND
application. The Company expects to receive further
reimbursement from Chiron for certain costs incurred during the
development of the Procleix Ultrio and WNV assays.
With respect to the Company’s collaboration with Chiron,
both parties have obligations to each other. The Company is
obligated to manufacture and supply its blood screening assay to
Chiron, and Chiron is obligated to purchase all of the
quantities of this assay specified on a 90-day demand forecast,
due 90 days prior to the date Chiron intends to take
delivery, and certain quantities specified on a rolling 12-month
forecast.
In connection with the joint development of the Procleix HIV-1/
HCV assay, and as a condition for Chiron’s agreement to pay
for most of the clinical trial costs related to approval of that
assay, the Company agreed to pay the costs related to the
clinical trial for the next joint development project with
Chiron. The obligation of Gen-Probe was limited to the cost
incurred for the previous joint clinical trial, which was
approximately $4,100,000. During the year ended
December 31, 2004, the Company satisfied this obligation
and began to bill Chiron for its share of qualifying clinical
trial expenses for the eSAS Ultrio and WNV projects in
accordance with their agreement.
Under the strategic alliance agreement the Company entered into
with Chiron in June 1998, the Company has responsibility for
research, development and manufacturing of the blood screening
products covered by the agreement, while Chiron has
responsibility for marketing, distribution and service of the
blood screening products worldwide. During the first quarter of
2004, the Company recognized as royalty and license revenue, a
$6,500,000 milestone payment, as the Company began clinical
trial tests of the Procleix Ultrio assay on the TIGRIS
instrument in the United States. Additional payments of up to
$10,000,000 are due to the Company in the future under the
agreement if they achieve certain other specified milestones
relating to
F-27
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
the development of the TIGRIS instrument. There is no guarantee
they will receive any additional milestone payments under this
agreement.
License agreements
In connection with its research and development efforts, the
Company has various license agreements with unrelated parties
which provide the Company with rights to develop and market
products using certain technology and patent rights maintained
by the parties. Terms of the various license agreements require
the Company to pay royalties ranging from 1% up to 16% of future
sales on products using the specified technology. Such
agreements generally provide for a term which commences upon
execution and continues until expiration of the last patent
relative to the technology.
Effective January 1, 2004, the Company entered into an
agreement with Tosoh Corporation to cross-license intellectual
property covering certain NAT technologies. The licenses cover
products in clinical diagnostics and other related fields. Under
the agreement, Tosoh received non-exclusive rights to the
Company’s proprietary Transcription-Mediated Amplification,
or TMA, and rRNA technologies in exchange for two payments
during 2004 totalling $7,000,000, which was recognized as
revenue in the first quarter of 2004 as there were no additional
obligations placed on the Company after the effective date of
the contract and the transfer of the technology. Additionally,
Tosoh will pay the Company royalties on worldwide sales of any
future products that employ Gen-Probe’s technologies
licensed by Tosoh. The Company will gain access, in exchange for
the payment of royalties, to Tosoh’s patented Transcription
Reverse-Transcription Concerted, or TRC, amplification and
Intercalation Activating Fluorescence, or INAF, detection
technologies for use with their real time TMA technology.
During 1995, the Company granted to Becton Dickinson a
non-exclusive license to certain patented methods for detecting
specific infectious diseases. In exchange for this license,
Gen-Probe received a license fee and will receive a royalty on
all sales of licensed products under the agreement. Royalties
received from Becton Dickinson amounted to $653,000, $569,000
and $494,000 for the years ended December 31, 2004, 2003
and 2002, respectively.
Government contract
In January 2000, the Company began work on a three-year
$13,400,000 cost sharing contract with the NIH, to modify the
Procleix HIV-1/ HCV assay to incorporate HBV detection
capability and make it simpler for organ donation centers to
test the blood of organ donors. Under the terms of the
agreement, the NIH will reimburse the Company $7,800,000. The
Company recorded contract revenues under the reimbursement
contract as costs were incurred. Costs incurred were recorded in
research and development expenses. Contract revenues recorded
for the year ended December 31, 2002 were $3,067,000.
Billings under the contract were completed in 2002.
The Company received a $1,000,000 contract extension from the
NIH in October of 2002 to develop a NAT assay for the detection
of the WNV. This amount was further increased by an additional
$2,470,000 in February 2003. In addition, in February 2003, the
Company filed for an IND covering the WNV. Contract revenues
recorded under these extensions were $3,470,000 for the year
ended December 31, 2003. Billings under these contract
extensions were completed in September 2003.
In November 2003, the Company received $4,300,000 of
supplemental contract funding from the NIH. This contract
extension supported the Company’s pursuit of clinical
studies and submission of a BLA, for our nucleic acid test for
the detection of WNV in donated human blood. The Company
initiated the development of this assay and has recognized
collaborative research revenue under the contract extension as
reimbursable costs were incurred. As of July 2004, the Company
had billed and collected all monies under this contract.
F-28
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
| Litigation |
The Company is a party to the following litigation and may
participate in other litigation in the ordinary course of
business. The Company intends to vigorously defend its interests
in these matters. The Company expects that the resolution of
these matters will not have a material adverse effect on its
business, financial condition or results of operations. However,
due to the uncertainties inherent in litigation, no assurance
can be given as to the outcome of these proceedings. If any of
these matters were resolved in a manner unfavorable to the
Company, its business, financial condition and results of
operations would be harmed.
Enzo Biochem, Inc.
In June 1999, the Company was sued by Enzo Biochem, Inc. in the
United States District Court for the Southern District of New
York. Enzo alleged that the Company and other defendants, have
willfully infringed United States patent no. 4,900,659, or the
“ ’659 patent,” through the manufacture and
sale of products for the diagnosis of gonorrhea. Enzo has
asserted a damage claim based on a contention that Enzo was
entitled to a reasonable royalty on all sales of Gen-Probe
products for the detection of Neisseria gonorrhoeae
bacteria from June 1993 through trial. Revenues from tests
for the detection of Neisseria gonorrhoeae have
constituted a significant portion of Gen-Probe’s revenues
during the relevant period. The Company believes that the claims
of the ’659 patent are invalid, unenforceable and may not
be properly interpreted to cover its products. On July 27,
2004, the Court granted summary judgment in favor of the
defendants and against Enzo, holding that the ’659 patent
is invalid based on the on-sale doctrine. Enzo has appealed the
summary judgment to the United States Court of Appeals for the
Federal Circuit. The parties have not yet completed their
submissions of briefs to the Court of Appeals. The Company
intends to vigorously defend the lawsuit. However, there can be
no assurance that the case will be resolved in the
Company’s favor.
Bayer Corporation
In November 2002, the Company filed a demand for arbitration
against Bayer Corporation, or Bayer, in the Judicial
Arbitration & Mediation Services, Inc., or JAMS, office
in San Diego, California related to the Company’s
collaboration with Bayer for nucleic acid diagnostic tests for
viral organisms. Under the terms of the collaboration agreement,
Bayer acquired the exclusive right to distribute nucleic acid
diagnostic tests designed and developed by Gen-Probe for the
detection of HIV, hepatitis viruses and other specified viruses,
subject to certain conditions. Gen-Probe’s demand for
arbitration stated that Bayer failed to fulfill the conditions
required to maintain exclusive distribution rights. The
arbitration demand seeks confirmation that the agreement grants
Gen-Probe, in the present circumstances, a co-exclusive right to
directly distribute the viral diagnostic tests that are the
subject of the agreement. In November 2003, Bayer filed a
counterclaim for money damages based on alleged delays in the
development of the TIGRIS instrument, alleged delays in the
development of certain assays, and other claims. Bayer
Healthcare LLC has also been added as a respondent and
counterclaimant. The hearing on the matter began on
September 13, 2004 and closing arguments were completed on
November 3, 2004. The arbitrator agreed to review
additional written testimony following closing arguments, and
has informed the parties that he intends to issue a written
decision on or about March 25, 2005. There can be no
assurances as to the final outcome of the arbitration.
On March 17, 2004, the Company filed a patent infringement
action in the United States District Court for the Southern
District of California against Bayer Corporation and Bayer
Healthcare LLC, alleging that Bayer’s bDNA nucleic acid
tests for HIV and HCV infringe Gen-Probe’s U.S. patent
no. 5,955,261, entitled “Method for Detecting the Presence
of Group-Specific Viral mRNA in a Sample.” Bayer’s
bDNA tests are not covered by the collaboration agreement
between the companies. Bayer has denied the allegations of
F-29
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
infringement and alleged that the patent is invalid or
unenforceable. No trial date has been set. There can be no
assurances as to the final outcome of the litigation.
Other
The Company is obligated to purchase raw materials used in
manufacturing and instrumentation from two key vendors. The
minimum purchase commitment is approximately $15,085,000 for the
year ended December 31, 2005.
| 10. | Significant customers and geographic information |
During the years ended December 31, 2004, 2003 and 2002,
47%, 42% and 30%, respectively, of net revenues were from one
customer. No other customer accounted for more than 10% of
revenues in any fiscal year.
During the years ended December 31, 2004, 2003 and 2002,
43%, 41% and 27%, respectively, of product sales were from the
sale of commercially approved blood screening products. Other
revenues related to the development of blood screening products
prior to commercial approval are recorded in collaborative
research revenue as disclosed in Note 9, Collaborative
Agreements. During the years ended December 31, 2004, 2003
and 2002, 57%, 59% and 73%, respectively, of product sales were
from the sale of clinical diagnostic products and instruments.
Total revenues by geographic region were as follows (in
thousands):
| Years Ended December 31 | |||||||||||||
| 2004 | 2003 | 2002 | |||||||||||
|
Total revenue:
|
|||||||||||||
|
North America
|
$ | 224,607 | $ | 180,924 | $ | 132,355 | |||||||
|
Rest of World
|
45,100 | 26,267 | 23,242 | ||||||||||
| $ | 269,707 | $ | 207,191 | $ | 155,597 | ||||||||
| 11. | Employee benefit plan |
Effective May 1, 1990, Gen-Probe established a Defined
Contribution Plan (the “Plan”) covering substantially
all employees of Gen-Probe Incorporated beginning the month
after they are hired. Employees may contribute up to 20% of
their compensation per year (subject to a maximum limit imposed
by federal tax law). Gen-Probe is obligated to make matching
contributions each payroll equal to a maximum of 50% of the
first 6% of compensation contributed by the employee. The
contributions charged to operations related to Gen-Probe
employees totaled $1,332,000, $1,110,000 and $985,000 for the
years ended December 31, 2004, 2003 and 2002, respectively.
| 12. | Quarterly information (unaudited) |
The following tables set forth the quarterly results of
operations for each quarter within the two-year period ended
December 31, 2004 (in thousands, except per share data).
The information for each of these quarters is unaudited and has
been prepared on the same basis as the Company’s audited
financial statements. In the opinion of management, all
necessary adjustments, consisting only of normal recurring
accruals, have been included to fairly present the unaudited
quarterly results when read in conjunction with our audited
F-30
Table of Contents
GEN-PROBE INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
financial statements and related notes. The operating results of
any quarter are not necessarily indicative of results for any
future period.
| Quarter Ended | |||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | ||||||||||||||
|
2004
|
|||||||||||||||||
|
Total revenues
|
$ | 76,486 | $ | 61,225 | $ | 63,487 | $ | 68,509 | |||||||||
|
Cost of product sales
|
13,864 | 13,164 | 15,272 | 17,608 | |||||||||||||
|
Total operating expenses
|
46,378 | 43,114 | 46,544 | 51,173 | |||||||||||||
|
Net income
|
19,728 | 11,761 | 11,110 | 11,976 | |||||||||||||
|
Net income per share:
|
|||||||||||||||||
|
Basic
|
$ | 0.40 | $ | 0.24 | $ | 0.22 | $ | 0.24 | |||||||||
|
Diluted
|
$ | 0.39 | $ | 0.23 | $ | 0.22 | $ | 0.23 | |||||||||
| Quarter Ended | |||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | ||||||||||||||
|
2003
|
|||||||||||||||||
|
Total revenues
|
$ | 46,168 | $ | 50,682 | $ | 52,281 | $ | 58,060 | |||||||||
|
Cost of product sales
|
12,919 | 11,055 | 10,828 | 10,656 | |||||||||||||
|
Total operating expenses
|
33,433 | 38,760 | 39,432 | 43,217 | |||||||||||||
|
Net income
|
8,654 | 8,149 | 8,850 | 9,677 | |||||||||||||
|
Net income per share:
|
|||||||||||||||||
|
Basic
|
$ | 0.18 | $ | 0.17 | $ | 0.18 | $ | 0.20 | |||||||||
|
Diluted
|
$ | 0.18 | $ | 0.17 | $ | 0.18 | $ | 0.19 | |||||||||
F-31
Table of Contents
SCHEDULE II — VALUATION AND QUALIFYING
ACCOUNTS
FOR THE THREE Years Ended December 31, 2004
(In thousands)
| Addition | |||||||||||||||||
| Balance at | Charged to | Balance at | |||||||||||||||
| Beginning | Cost and | End of | |||||||||||||||
| of Period | Expenses(1) | Deductions(2) | Period | ||||||||||||||
|
Allowance for doubtful accounts:
|
|||||||||||||||||
|
Year Ended December 31, 2004:
|
$ | 717 | $ | — | $ | (53 | ) | $ | 664 | ||||||||
|
Year Ended December 31, 2003:
|
787 | (48 | ) | (22 | ) | 717 | |||||||||||
|
Year Ended December 31, 2002:
|
824 | (10 | ) | (27 | ) | 787 | |||||||||||
|
Inventory reserves:
|
|||||||||||||||||
|
Year Ended December 31, 2004:
|
8,694 | 15,868 | (15,495 | ) | 9,067 | ||||||||||||
|
Year Ended December 31, 2003:
|
12,105 | 12,263 | (15,674 | ) | 8,694 | ||||||||||||
|
Year Ended December 31, 2002
|
14,060 | 4,115 | (6,070 | ) | 12,105 | ||||||||||||
| (1) | For inventory reserves, includes net favorable manufacturing variances capitalized against inventory. |
| (2) | Represents amounts written off against the allowance or reserves; or for net favorable manufacturing variances, credited to cost of products sold. |
S-1
Table of Contents
INDEX TO EXHIBITS
| Exhibit | ||||
| Number | Description | |||
| 2 | .1(3) | Separation and Distribution Agreement, dated and effective as of May 24, 2002, and amended and restated as of August 6, 2002, by and between Chugai Pharmaceutical Co., Ltd. and Gen-Probe Incorporated . | ||
| 3 | .1(3) | Form of Amended and Restated Certificate of Incorporation of Gen-Probe Incorporated. | ||
| 3 | .2(14) | Certificate of Amendment of Amended and Restated Certificate of Incorporation of Gen-Probe Incorporated. | ||
| 3 | .3(3) | Form of Amended and Restated Bylaws of Gen-Probe Incorporated. | ||
| 3 | .4(14) | Certificate of Designations of the Series A Junior Participating Preferred Stock of Gen-Probe Incorporated. | ||
| 4 | .1(3) | Specimen common stock certificate. | ||
| 4 | .2(5) | Rights Agreement, dated as of September 16, 2002, between Gen-Probe Incorporated and Mellon Investor Services LLC, which includes the form of Certificate of Designations of the Series A Junior Participating Preferred Stock of Gen-Probe Incorporated as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C. | ||
| 4 | .3(6) | First Amendment to Rights Agreement, dated October 9, 2002, between Gen-Probe Incorporated and Mellon Investor Services LLC. | ||
| 4 | .4(11) | Second Amendment to Rights Agreement, dated November 20, 2003. | ||
| 10 | .1(2) | Transition Services Agreement, dated April 4, 2002, by and between Chugai Pharma USA, LLC and Gen-Probe Incorporated. | ||
| 10 | .2(4) | Form of Tax Sharing Agreement between Chugai Pharma USA, LLC and Gen-Probe Incorporated. | ||
| 10 | .3(13)‡ | The 2000 Equity Participation Plan of Gen-Probe Incorporated. | ||
| 10 | .4(15)‡ | The 2000 Equity Participation Plan Form of Agreement and Grant Notices. | ||
| 10 | .5(13)‡ | The 2002 New Hire Stock Option Plan. | ||
| 10 | .6(15)‡ | The 2002 New Hire Stock Option Plan Form of Agreement and Grant Notice. | ||
| 10 | .7(13)‡ | The 2003 Incentive Award Plan of Gen-Probe Incorporated. | ||
| 10 | .8(15)‡ | The 2003 Incentive Award Plan Form of Agreement and Grant Notice. | ||
| 10 | .9(15)‡ | The 2003 Incentive Award Plan Form of Restricted Stock Award Agreement and Grant Notice. | ||
| 10 | .10(10)‡ | Amendment No. 1 to the 2003 Incentive Award Plan of Gen-Probe Incorporated. | ||
| 10 | .11(14)‡ | Employee Stock Purchase Plan. | ||
| 10 | .12(4) | Agreement dated as of June 11, 1998 between Gen-Probe Incorporated and Chiron Corporation.* | ||
| 10 | .13(4) | Addendum dated June 11, 1998 to Agreement dated as of June 11, 1998 between Gen-Probe Incorporated and Chiron Corporation.* | ||
| 10 | .14(4) | Amendment dated December 7, 1999 to Agreement dated as of June 11, 1998 between Gen-Probe Incorporated and Chiron Corporation. | ||
| 10 | .15(1) | Amendment No. 2 dated February 1, 2000 to Agreement dated as of June 11, 1998 between Gen-Probe Incorporated and Chiron Corporation. | ||
| 10 | .16(4) | Amendment No. 3 effective April 1, 2002 to Agreement dated as of June 11, 1998 between Gen-Probe Incorporated and Chiron Corporation.* | ||
| 10 | .17(9) | Amendment No. 4 effective March 5, 2003 to Agreement dated as of June 11, 1998 between Gen-Probe Incorporated and Chiron Corporation. | ||
| 10 | .18(12) | Amendment No. 5 effective January 1, 2004 to Agreement dated as of June 11, 1998 between Gen-Probe Incorporated and Chiron Corporation. | ||
| 10 | .19(12) | Future Blood Screening Assay — Ultrio Addendum effective January 1, 2001 to the Agreement dated as of June 11, 1998 between Gen-Probe Incorporated and Chiron Corporation.* | ||
Table of Contents
| Exhibit | ||||
| Number | Description | |||
| 10 | .20(12) | Future Blood Screening Assay — West Nile Virus Addendum effective June 1, 2003 to the Agreement dated as of June 11, 1998 between Gen-Probe Incorporated and Chiron Corporation.* | ||
| 10 | .21(1) | Supplemental Agreement dated April 2, 2001 to the Agreement dated June 11, 1998 for Development, Distribution and Licensing of TMA Products between Gen-Probe Incorporated and Bayer.* | ||
| 10 | .22(4) | Amended and Restated ANAIS License, Development and Cooperation Agreement entered into as of August 4, 2000 between Gen-Probe Incorporated and bioMérieux, Inc.* | ||
| 10 | .23(4) | Amended and Restated VIDAS License, Development and Cooperation Agreement entered into as of August 4, 2000 between Gen-Probe Incorporated and bioMérieux, Inc.* | ||
| 10 | .24(1) | Distribution Agreement entered into May 2, 1997 between Gen-Probe Incorporated and bioMérieux S.A.* | ||
| 10 | .25(4) | Distributorship Arrangements Agreement entered into May 2, 1997 between Gen-Probe Incorporated and bioMérieux S.A.* | ||
| 10 | .26(1) | Renewal Amendment entered into November 2, 1999 to the Distribution Agreement and the Distributorship Arrangements Agreement dated May 2, 1997 between Gen-Probe Incorporated and bioMérieux S.A. | ||
| 10 | .27(1) | First Amendment entered into August 4, 2000 to the Renewed Distribution Agreement and the Distributorship Arrangements Agreement dated May 2, 1997 between Gen-Probe Incorporated and bioMérieux S.A.* | ||
| 10 | .28(14) | 2003 Amendment to the Renewed Distribution Agreement and the Distributorship Arrangements Agreement dated May 2, 1997, entered into May 2, 2003 by and between Gen-Probe Incorporated and bioMérieux, S.A.* | ||
| 10 | .29(15) | Ribosomal Nucleic Acid License and Option Agreement (for Easy Q Instrument) dated September 30, 2004 by and between Gen-Probe Incorporated and bioMérieux B.V.* | ||
| 10 | .30(15) | Guarantee Agreement dated September 30, 2004 by bioMérieux SA, on behalf of its subsidiary bioMérieux, Inc. in favor of Gen-Probe Incorporated. | ||
| 10 | .31(15) | Ribosomal Nucleic Acid License and Option Agreement (for GeneXpert Instrument) dated September 30, 2004 by and between Gen-Probe Incorporated and bioMérieux, Inc.* | ||
| 10 | .32(15) | Guarantee Agreement dated September 30, 2004, by bioMérieux SA, on behalf of its subsidiary bioMérieux b.v. in favor of Gen-Probe Incorporated. | ||
| 10 | .33(15) | Side Letter dated October 1, 2004 by and between Gen-Probe Incorporated, bioMérieux B.V., and bioMérieux, Inc.* | ||
| 10 | .34(15) | License Agreement entered into September 30, 2004 by and between Gen-Probe Incorporated and bioMérieux B.V.* | ||
| 10 | .35(15) | Vidas Termination Agreement entered into September 30, 2004 by and between Gen-Probe Incorporated and bioMérieux, Inc.* | ||
| 10 | .36(4) | License Agreement effective as of July 1, 2001 between Gen-Probe Incorporated and Rebio Gen, Inc. (as successor-in-interest to Chugai Diagnostics Science Co., Ltd.).* | ||
| 10 | .37(4) | Distribution Agreement effective as of September 1, 1998 between Gen-Probe Incorporated and Rebio Gen, Inc. (as successor-in-interest to Chugai Diagnostics Science Co., Ltd.).* | ||
| 10 | .38(4) | First Amendment effective June 30, 2002 to September 1, 1998 Distribution Agreement between Gen-Probe Incorporated and Rebio Gen, Inc. (as successor-in-interest to Chugai Diagnostics Science Co., Ltd.).* | ||
| 10 | .39(4) | Co-Exclusive Agreement effective as of April 23, 1997 between Gen-Probe Incorporated and The Board of Trustees of the Leland Stanford Junior University.* | ||
| 10 | .40(1) | Amendment No. 1 effective April, 1998 to the License Agreement effective April 23, 1997 between Stanford University and Gen-Probe Incorporated.* | ||
| 10 | .41(4) | Non-Assertion Agreement effective as of February 7, 1997 between Gen-Probe Incorporated and Organon Teknika B.V.* | ||
| 10 | .42(12) | Agreement effective as of July 12, 1984 between the Welsh National School of Medicine and Bioanalysis Limited.* | ||
Table of Contents
| Exhibit | ||||
| Number | Description | |||
| 10 | .43(12) | Agreement effective July 12, 1990 between University of Wales College of Medicine and Molecular Light Technology Limited.* | ||
| 10 | .44(4) | License Agreement effective as of January 21, 1986 among Gen-Probe Incorporated, Bioanalysis, Ltd. And the University of Wales College of Medicine.* | ||
| 10 | .45(4) | Amendment entered into as of May 11, 1989 to the License Agreement effective as of January 21, 1986 among Gen-Probe Incorporated, Bioanalysis, Ltd. and the University of Wales College of Medicine.* | ||
| 10 | .46(4) | Amendment entered into as of November 19, 1998 to the License Agreement effective as of January 21, 1986 among Gen-Probe Incorporated, Bioanalysis, Ltd. and the University of Wales College of Medicine.* | ||
| 10 | .47(4) | Third Amendment entered into as of February 19, 2002 to the License Agreement effective as of January 21, 1986 among Gen-Probe Incorporated, Bioanalysis, Ltd. And the University of Wales College of Medicine.* | ||
| 10 | .48(12) | Amendment Agreement entered into as of July 8, 2003 related to Certain Licence Agreements between the University of Wales College of Medicine, Bioanalysis Limited and Gen-Probe Incorporated. | ||
| 10 | .49(4) | Non-exclusive License Agreement dated June 22, 1999 between Gen-Probe Incorporated and Vysis, Inc.* | ||
| 10 | .50(15) | Settlement Agreement entered into September 17, 2004 by and between Gen-Probe Incorporated and Vysis, Inc.* | ||
| 10 | .51(15) | Amendment to Nonexclusive License Agreement under Vysis’ Collins Patents entered into September 17, 2004 by and between Gen-Probe Incorporated and Vysis, Inc.* | ||
| 10 | .52(4) | Amended and Restated License Agreement dated June 19, 2002 between Gen-Probe Incorporated and The Public Health Research Institute of The City of New York, Inc.* | ||
| 10 | .53(4) | Development, License and Supply Agreement entered into as of October 16, 2000 between Gen-Probe Incorporated and KMC Systems, Inc.* | ||
| 10 | .54(1) | First Amendment made as of September, 2001 to Agreement entered into as of October 16, 2000 between Gen-Probe Incorporated and KMC Systems, Inc.* | ||
| 10 | .55(1) | Contract effective as of January 1, 2000 between Gen-Probe Incorporated and the National Institutes of Health (No. N01-HB-07148). | ||
| 10 | .56(12) | Modification No. 9 effective as of November 5, 2003 to the Contract effective as of January 1, 2000 between Gen-Probe Incorporated and the National Institutes of Health (No. N01-HB-07148) | ||
| 10 | .57(4) | Supply Agreement effective as of March 5, 1998 between Gen-Probe Incorporated and Boehringer Mannheim GmbH.* | ||
| 10 | .58(1) | First Amendment effective as of February 12, 2001 between Gen-Probe Incorporated and Roche Diagnostics GmbH, the successor-in-interest to Boehringer Mannheim GmbH, to the Supply Agreement effective as of March 5, 1998 between Gen-Probe Incorporated and Boehringer Mannheim GmbH.* | ||
| 10 | .59† | Second Amendment effective as of August 31, 2004 between Gen-Probe Incorporated and Roche Diagnostics, the successor-in-interest to Boehringer Mannheim GmbH, to the Supply Agreement effective as of March 5, 1998 between Gen-Probe Incorporated and Boehringer Mannheim GmbH.** | ||
| 10 | .60(12) | License, Development and Cooperation Agreement between Gen-Probe Incorporated and DiagnoCure Inc. effective as of November 19, 2003.* | ||
| 10 | .61(12) | Target License Agreement between Tosoh Corporation and Gen-Probe Incorporated effective as of January 1, 2004.* | ||
| 10 | .62(12) | TRC License Agreement between Tosoh Corporation and Gen-Probe Incorporated effective as of January 1, 2004.* | ||
| 10 | .63(12) | TMA License Agreement between Tosoh Corporation and Gen-Probe Incorporated effective as of January 1, 2004.* | ||
Table of Contents
| Exhibit | ||||
| Number | Description | |||
| 10 | .64(14) | Supply Agreement entered into January 1, 2002 by and between Gen-Probe Incorporated and MGM Instruments, Inc.* | ||
| 10 | .65(14) | Supply Agreement Amendment Number One entered into June 4, 2004 by and between Gen-Probe Incorporated and MGM Instruments, Inc.* | ||
| 10 | .66 † | License Agreement between AdnaGen AG and Gen-Probe Incorporated effective as of December 30, 2004.** | ||
| 10 | .67 † | License Agreement between Corixa Corporation and Gen-Probe Incorporated effective as of December 31, 2004.** | ||
| 10 | .68(3) | Credit Agreement dated April 10, 2001, by and between Gen-Probe Incorporated, Gen-Probe Sales & Service, Inc. and Wells Fargo Bank, National Association. | ||
| 10 | .69(3) | First Amendment dated June 10, 2002 to Credit Agreement dated April 10, 2001 by and between Gen-Probe Incorporated, Gen-Probe Sales & Service, Inc. and Wells Fargo Bank, National Association. | ||
| 10 | .70(3) | Revolving Line of Credit Note dated July 1, 2002 made by Gen-Probe Incorporated and Gen-Probe Sales & Service, Inc. in favor of Wells Fargo Bank, National Association. | ||
| 10 | .71(2) | Promissory Note dated September 29, 2000 by Niall M. Conway and Margaret Conway. | ||
| 10 | .72(3)‡ | Form of Indemnification Agreement between Gen-Probe Incorporated and its Executive Officers and Directors. | ||
| 10 | .73(9)‡ | Employment Agreement dated as of April 2, 2003 between Gen-Probe Incorporated and Henry L. Nordhoff. | ||
| 10 | .74(12)‡ | First Amendment to Employment Agreement effective as of January 1, 2004 between Gen-Probe Incorporated and Henry L. Nordhoff. | ||
| 10 | .75(15)‡ | Deferred Issuance Restricted Stock Conversion Agreement, Deferred Issuance Award Agreement and Election Agreement between Gen-Probe Incorporated and Henry L. Nordhoff, dated October 8, 2004. | ||
| 10 | .76‡† | Form of Employment Agreement — Executive Team. | ||
| 10 | .77‡† | Form of Employment Agreement — Vice Presidents. | ||
| 10 | .78(8)‡ | Gen-Probe Incorporated Change-In-Control Severance Compensation Plan for Employees. | ||
| 21 | .1(12) | List of subsidiaries of Gen-Probe Incorporated. | ||
| 23 | .1† | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm. | ||
| 31 | .1† | Certification dated March 15, 2005, of Principal Executive Officer required pursuant to 18 USC. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 31 | .2† | Certification dated March 15, 2005, of Principal Financial Officer required pursuant to 18 USC. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 32 | .1† | Certification dated March 15, 2005, of Principal Executive Officer required pursuant to 18 USC. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 32 | .2† | Certification dated March 15, 2005, of Principal Financial Officer required pursuant to 18 USC. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. | ||
| † | Filed herewith. | |
| ‡ | Indicates management contract or compensatory plan, contract or arrangement. |
| (1) | Incorporated by reference to Gen-Probe’s Registration Statement on Form 10 filed with the SEC on May 24, 2002. | |
| (2) | Incorporated by reference to Gen-Probe’s Amendment No. 1 to Registration Statement on Form 10 filed with the SEC on July 29, 2002. | |
| (3) | Incorporated by reference to Gen-Probe’s Amendment No. 2 to Registration Statement on Form 10 filed with the SEC on August 14, 2002. | |
| (4) | Incorporated by reference to Gen-Probe’s Amendment No. 3 to Registration Statement on Form 10 filed with the SEC on September 5, 2002. |
Table of Contents
| (5) | Incorporated by reference to Gen-Probe’s Report on Form 8-K filed with the SEC on September 17, 2002. | |
| (6) | Incorporated by reference to Gen-Probe’s Quarterly Report on Form 10-Q filed with the SEC on November 14, 2002. | |
| (7) | Incorporated by reference to Gen-Probe’s Report on Form S-8 filed with the SEC on March 18, 2003. | |
| (8) | Incorporated by reference to Gen-Probe’s Annual Report on Form 10-K filed with the SEC on March 24, 2003. | |
| (9) | Incorporated by reference to Gen-Probe’s Quarterly Report on Form 10-Q filed with the SEC on May 9, 2003. |
| (10) | Incorporated by reference to Gen-Probe’s Report on Form S-8 filed with the SEC on May 29, 2003 |
| (11) | Incorporated by reference to Gen-Probe’s Report on Form 8-K filed with the SEC on November 21, 2003. |
| (12) | Incorporated by reference to Gen-Probe’s Annual Report on Form 10-K filed with the SEC on March 9, 2004 |
| (13) | Incorporated by reference to Gen-Probe’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2004 |
| (14) | Incorporated by reference to Gen-Probe’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2004. |
| (15) | Incorporated by reference to Gen-Probe’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2004 |
| * | Gen-Probe has been granted confidential treatment with respect to certain portions of this exhibit. |
| ** | Gen-Probe has requested confidential treatment with respect to certain portions of this exhibit. |