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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

	(Mark One)

Commission File Number 0-21872

GEN-PROBE INCORPORATED

10210 Genetic Center Drive
San Diego, CA 92121
(Address of principal executive offices)

(858) 410-8000
(Registrant’s telephone number, including area code)

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

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [  ]  No [X]

     As of May 2, 2003, there were 23,804,207 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.

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GEN-PROBE INCORPORATED

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Item 1. Financial Statements

Gen-Probe Incorporated
Consolidated Balance Sheets
(in thousands,
except share and per share data)

     See accompanying notes.

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Gen-Probe Incorporated
Consolidated Statements of Income
(in thousands, except per share data)

     See accompanying notes.

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Gen-Probe Incorporated
Consolidated Statements of Cash Flows
(in thousands)

     See accompanying notes.

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Notes to the Consolidated Financial Statements (unaudited)

Note 1 — Basis of Presentation

     The accompanying interim consolidated financial statements of Gen-Probe Incorporated (“Gen-Probe” or the “Company”) at March 31, 2003, and for the three month periods ended March 31, 2002 and 2003, are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In management’s opinion, the unaudited financial statements include all adjustments, consisting only of normal recurring accruals, necessary to state fairly the financial information therein, in accordance with generally accepted accounting principles. Interim results are not necessarily indicative of the results which may be reported for any other interim period or for the year ending December 31, 2003.

     These unaudited consolidated financial statements and footnotes thereto should be read in conjunction with the audited financial statements and footnotes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

Note 2 — Reporting Periods

     The Company operates and reports on fiscal periods ending on the Friday closest to the end of the month except for year-end, which closes December 31. For ease of presentation, the quarterly reporting periods are deemed to end on March 31, June 30 and September 30. The three month periods ended March 31, 2002 and 2003 each included 13 weeks.

Note 3 — Recent Accounting Pronouncements

     In 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 145, “Rescission of SFAS Nos. 4, 44 and 64, Amendment of SFAS No. 13 and Technical Correction as of April 2002.” This statement rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendment of that statement, SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” The Company adopted this statement 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, net of tax benefit, to interest expense on the statement of income. The tax benefit will be reflected as a component of income tax expense. The reported net income did not change.

     In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This statement supersedes the guidance proposed by Emerging Issues Task Force 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 was required to be adopted for exit or disposal activities initiated after December 31, 2002. The adoption of this statement is not expected to have a significant impact on the Company’s financial statements.

     In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure – an amendment of FASB Statement No. 123.” This statement amends SFAS No. 123 “Accounting for Stock Based Compensation” to provide alternative methods of voluntarily transitioning to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require disclosure of the method used to account for stock-based employee compensation and the effect of the method on reported results in both annual and interim financial statements. The Company will not adopt fair value accounting for employee stock options under SFAS No. 123 and SFAS No. 148, but will continue to disclose the required pro-forma information in the notes to the consolidated financial statements.

     Pro forma information regarding net income is required by SFAS No. 148, and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 148. The fair value for these options was estimated at the dates of grant using the minimum value option pricing model for the three months ended March 31, 2002 and the Black Scholes pricing model for the three months ended March 31, 2003. The following assumptions for 2002 and 2003 were used: risk-free interest rates ranging from 2.36% to 4.15%, volatility of 0% for the three months ended March 31, 2002 and averaging 51.06% for the three months ended March 31, 2003, dividend yield of 0% and expected life of 4 years.

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     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. 148, the Company’s net income and net income per share would have been as follows (in thousands, except per share data):

     The pro forma effects on net income for the three months ended March 31, 2002 and 2003 are not likely to be representative of the effects on reported net income in future periods. In management’s opinion, existing stock option valuation models do not provide a reliable single measure of the fair value of employee stock options that have vesting provisions and are not transferable. In addition, 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.

Note 4 — Net Income Per Share

     Gen-Probe computes net income per share in accordance with SFAS No. 128, “Earnings Per Share,” and the Securities and Exchange Commission (“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. No common shares have been issued for nominal consideration. The Company had outstanding for all periods 23,799,945 shares of common stock. 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):

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     Dilutive securities include common stock options subject to vesting. Potentially dilutive securities totaling 1,782,687 and 1,362,777 shares for the three months ended March 31, 2002 and 2003, respectively, were excluded from the calculation of diluted earnings per share because they are not currently dilutive.

Note 5 — Comprehensive Income

     Components of comprehensive income, net of income taxes, were as follows (in thousands):

Note 6 — Inventories

     Net inventories are comprised of the following (in thousands):

Note 7 — Stockholders’ Equity

Stock Options

     The Board of Directors of the Company adopted the 2003 Incentive Award Plan of Gen-Probe Incorporated (the “2003 Plan”) in March 2003 and reserved 3,750,000 shares of common stock for grants under the 2003 Plan. The Plan is expected to provide incentives for officers, employees and consultants through the granting of stock options, restricted stock and stock appreciation rights. The 2003 Plan is subject to approval by the stockholders’ at the Annual Meeting of Stockholders to be held on May 29, 2003.

Employee Stock Purchase Plan

     The Board of Directors of the Company adopted the Employee Stock Purchase Plan of Gen-Probe Incorporated in March 2003 and reserved 500,000 shares of common stock for issuance thereunder. The Employee Stock Purchase Plan is expected to provide incentives for officers and employees to acquire stock ownership in the Company. The Employee Stock Purchase Plan is subject to approval by the stockholders’ at the Annual Meeting of Stockholders to be held on May 29, 2003.

Note 8 — Litigation

     The Company is involved in certain lawsuits and legal proceedings. While there can be no assurances as to the ultimate outcome of such litigation, management expects that the resolution of these matters will not have a material adverse effect on the Company’s financial position or its ability to conduct business.

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, its former affiliates, Becton Dickinson, and bioMérieux have willfully infringed United States patent no. 4,900,659, or the “ ‘659 patent,” through the manufacture and sale of products for the detection of gonorrhea. On January

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24, 2001, the district court granted the Company’s motion for summary judgment, finding that the ‘659 patent is invalid. Enzo appealed the judgment to the Federal Circuit Court of Appeals. On July 15, 2002, a panel of the Federal Circuit Court, after having previously affirmed the district court’s summary judgment decision, granted Enzo’s petition for rehearing and, without hearing further argument, reversed the district court’s order granting summary judgment and remanded the case to the district court for further proceedings. Following remand from the court of appeal, the Company’s former affiliates and bioMérieux were dismissed from the case by Enzo. The Company and Becton Dickinson remain as defendants. The Company anticipates that trial in the case will be set for the fourth quarter of 2003 or the first quarter of 2004. The Company expects Enzo to assert a damage claim based on a contention that Enzo is 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 and exceed $300 million. The Company believes that the claims of the ‘659 patent are invalid, unenforceable and may not be properly interpreted to cover its products. 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.

Vysis, Inc.

     In December 1999, the Company initiated litigation against Vysis, now a subsidiary of Abbott Laboratories, seeking a declaratory judgment that the Company’s products were not covered by a Vysis patent that is the subject of a license granted by Vysis in favor of the Company and that the patent is invalid and unenforceable. In August 2002, following a jury trial, the district court entered judgment in the Company’s favor, finding the Vysis patent invalid and finding that the patent does not cover Gen-Probe’s products. Vysis has filed a notice of appeal. Further, on October 22, 2002 the United States Patent & Trademark Office reissued the Vysis patent with amended claims. On October 22, 2002, the Company filed a lawsuit to challenge the validity and scope of the reissued patent. The Company believes that Vysis will contend that the August 2002 judgment concerning the original patent is not determinative of the validity and scope of the reissued patent. Pending further proceedings, the Company has continued to make royalty payments under its license with Vysis pending final resolution of the litigation. There can be no assurances as to the final outcome of the litigation.

Bayer Corporation

     In November 2002, the Company initiated an arbitration proceeding with respect to its collaboration with Bayer Corporation 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 and other specified viruses, subject to certain conditions. Gen-Probe’s demand for arbitration stated that Bayer has 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. Gen-Probe’s arbitration demand also seeks money damages due to Bayer’s failure to use commercially reasonable efforts to promote, market and sell viral diagnostic assays developed by Gen-Probe. Bayer has not yet responded to the arbitration demand, but has stated that it intends to file a counterclaim for money damages based on alleged delays in the development of the TIGRIS instrument system. There can be no assurances as the final outcome of the arbitration.

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

     This report contains “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995, which provides a “safe harbor” for these types of statements. To the extent statements in this report involve, without limitation, our expectations for growth, estimates of future revenue, expenses, profit, cash flow, balance sheet items or any other guidance on future periods, these statements are forward-looking statements. Forward-looking statements are not guarantees of performance. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to differ materially from any results, level of activity, performance or achievements expressed or implied by any forward-looking statement. We assume no obligation to update any forward-looking statements.

     The following information should be read in conjunction with the financial statements and the notes thereto included in Item 1 of this quarterly report and with the financial statements and notes thereto for the year ended December 31, 2002 and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contained in our Annual Report on Form 10-K for the year ended December 31, 2002. We also urge you to review and consider our disclosures describing various risks that may affect our business, which are set forth under the heading “Risk Factors” in Item 5 of this report and in our Annual Report on Form 10-K for the year ended December 31, 2002.

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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 20 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.

     On December 10, 2001, Chugai Pharmaceutical Co., Ltd., our former indirect parent, announced its intention to spin us off as a separate, stand alone company by distributing all of its shares of our common stock to its shareholders. On September 15, 2002, Chugai Pharmaceutical completed the distribution, and our common stock began regular way trading on the Nasdaq National Market on September 16, 2002. Prior to the spin-off, Chugai Pharmaceutical commenced a reorganization that resulted in us becoming a wholly owned subsidiary of Chugai Pharmaceutical. As part of the reorganization, on July 23, 2002, our former direct parent company, Gen-Probe Holding Company, Inc., merged into us, making us a wholly owned subsidiary of Chugai Pharmaceutical. Gen-Probe Holding was a non-operating holding company that at the time of the merger had approximately $75.9 million in cash and owned 37 acres of land, including the site of our headquarters, and approximately $1.5 million of other net assets.

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 both our NAT assays and, to a lesser extent, sales and rentals of the proprietary instruments that serve as the analytical platform for our assays. We recognize as collaborative research revenue payments we received from Chiron Corporation (“Chiron”) for the products we provided under our collaboration agreements with Chiron prior to regulatory approval and the payments we receive from Chiron, 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