UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission File Number 0-21872

GEN-PROBE INCORPORATED

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

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

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

     As of April 29, 2005, there were 50,544,479 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.

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GEN-PROBE INCORPORATED

TABLE OF CONTENTS
FORM 10-Q

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GEN-PROBE INCORPORATED

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

See accompanying notes to consolidated financial statements.

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GEN-PROBE INCORPORATED

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

See accompanying notes to consolidated financial statements.

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GEN-PROBE INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

See accompanying notes to consolidated financial statements.

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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, 2005, and for the three month periods ended March 31, 2005 and 2004, 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, 2005.

     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, 2004.

Note 2 — Reporting periods

     The Company historically 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 2004 quarterly periods were deemed to end on March 31, June 30, September 30 and December 31. Beginning in 2005, coinciding with the Company’s implementation of a new enterprise resource planning system, the Company’s fiscal quarters now end on March 31, June 30, September 30 and December 31. The three months ended March 31, 2005 included one less business day compared to the same period in the prior year.

Note 3 — Summary of significant accounting policies

Recent accounting pronouncement

     In December 2004, the Financial Accounting Standards Board (“FASB”) issued revised Statement No. 123 (“SFAS No. 123(R)”) “Share-Based Payment,” which requires companies to expense the estimated fair value of all share-based payments to employees, including grants of employee stock options. Pro forma disclosure is no longer an alternative. In April 2005, the Securities and Exchange Commission (“SEC”) adopted a rule that will effectively require the Company to implement SFAS No. 123(R) beginning on January 1, 2006.

     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 4 to the consolidated financial statements. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current standards. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized for excess tax deductions were $4,692,000 and $1,585,000 for the three month periods ended March 31, 2005 and 2004, respectively.

Principles of consolidation

     The consolidated financial statements of the Company include the accounts of the Company and its subsidiaries, Gen-Probe Sales & Service, Inc., Gen-Probe Canada, Inc., Gen-Probe UK Limited (“GPUK”) 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.

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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 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 subsidiarys’ financial statements are recorded directly as a separate component of stockholders’ equity under the caption “Accumulated other comprehensive income.”

Reclassifications

     Certain prior year amounts have been reclassified to conform with the current year presentation.

Note 4 — 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. For the three month periods ended March 31, 2005 and 2004, the following weighted average assumptions were used:

     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 three month periods ended March 31, 2005 and 2004 was estimated on the date of grant using the Black-Scholes pricing model.

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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, consistent with SFAS No. 123 accounting, 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 month periods ended March 31, 2005 and 2004 are not likely to be representative of the effects on reported net income in future years.

     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.

Note 5 — 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):

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     Dilutive securities include common stock options subject to vesting. Potentially dilutive securities totaling 127,500 and 145,470 shares for the three month periods ended March 31, 2005 and 2004, respectively, were excluded from the calculation of diluted earnings per share because of their anti-dilutive effect.

Note 6 — Comprehensive income

     Comprehensive income is comprised of net income and other comprehensive income (loss), 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.

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

Note 7 — Intangible assets by asset class and related accumulated amortization

The Company’s intangible assets and related accumulated amortization consisted of the following (in thousands):

     In January 2005, the Company entered into a license agreement with Corixa Corporation (“Corixa”) and received the right to develop molecular diagnostic tests for 46 potential genetic markers in the areas of prostate, ovarian, cervical, kidney, lung and colon cancers. Pursuant to the terms of the agreement, the Company paid Corixa an initial access license fee of $1.6 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 the Company terminates the agreement prior to those dates. The initial $1.6 million license fee has been recorded as an intangible asset which is being amortized on a straight-line basis to research and development expense over the life of the licensed patents.

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Note 8 — Inventories

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

Note 9 — Income taxes

     The Company accounts for income taxes during interim periods in accordance with SFAS No. 109, “Accounting for Income Taxes,” APB No. 28, “Interim Financial Reporting,” and FIN 18, “Accounting for Income Taxes in Interim Periods,” an interpretation of APB Opinion No. 28. For interim reporting purposes, these rules require that a company determine the best estimate of its annual effective tax rate and then apply that rate in providing for income taxes on a year-to-date basis.

     The Company currently estimates its annual effective income tax rate to be approximately 36% for 2005, as compared to the actual 35.5% effective income tax rate in 2004. The Company expects that it will have sufficient taxable income after stock option related deductions to utilize the majority of its deferred tax assets.

     Tax benefits of $4,692,000 and $1,585,000 in the three month periods ended March 31, 2005 and 2004, respectively, related to employee stock options and stock purchase plans were credited to stockholders’ equity.

Note 10 — Stockholders’ equity

     During the three month periods ended March 31, 2005 and 2004, options to purchase 405,895 and 295,529 shares of the Company’s common stock were exercised by Gen-Probe employees at a weighted average exercise price of $16.52 and $12.87, respectively. The Company also issued 746 and 2,085 shares of common stock at fair market value during the three month periods ended March 31, 2005 and 2004, respectively, to members of the Board of Directors as partial consideration for services rendered. The Company recognized expense for these shares issued to the members of the Board of Directors during the three month periods ended March 31, 2005 and 2004, of $33,965 and $72,512, respectively, which was equal to the fair market value on the dates of issuance. Further, employees purchased 56,717 shares of the Company’s common stock at an average price of $26.92 per share, during the three months ended March 31, 2004. There were no ESPP purchases during the three months ended March 31, 2005.

     Changes in stockholders’ equity for the three months ended March 31, 2005 were as follows (in thousands):

Note 11 – 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

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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 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. 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 Company and 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. Oral argument of the appeal has been scheduled for June 7, 2005. 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 sought confirmation that the agreement grants Gen-Probe, in the present circumstances, a co-exclusive right to directly distribute the viral diagnostic tests that are the subject of the agreement. In November 2003, Bayer filed a counterclaim for money damages based on alleged delays in the development of the TIGRIS instrument, alleged delays in the development of certain assays, and other claims. Bayer Healthcare LLC was also added as a respondent and counterclaimant. The hearing on the matter began on September 13, 2004 and closing arguments were completed on November 3, 2004.

     In April 2005, the Company received a tentative award in the arbitration. The arbitrator determined that the Company is entitled to a co-exclusive right to distribute qualitative Transcription-Mediated Amplification (“TMA”) assays to detect the hepatitis C virus and HIV-1. Bayer previously held the exclusive rights to market these products. The arbitrator also determined that the collaboration agreement should be prospectively terminated, as the Company requested. As a result of terminating the agreement, the Company will have the right to develop and market future viral assays that had been previously reserved for Bayer. Bayer will retain co-exclusive rights to distribute two products that it currently markets. Bayer also will be required to reimburse the Company $2.0 million for the Company’s legal fees and expenses related to the arbitration proceedings.

     The arbitrator rejected Bayer’s multimillion-dollar counterclaim for damages. The tentative decision is subject to further proceedings before the arbitrator related to implementation of the award and Bayer has a right to appeal the final award to an arbitration appeal panel within JAMS. While the Company expects the tentative decision of the arbitrator to remain substantially unchanged upon entry of the final award, there can be no assurances as to the final outcome of the arbitration.

     A separate patent infringement action that the Company filed in March 2004 against Bayer remains pending in the United States District Court for the Southern District of California. This action alleges that Bayer’s bDNA nucleic acid tests for HIV and HCV infringe Gen-Probe’s U.S. patent no. 5,955,261, entitled “Method for Detecting the Presence of Group-Specific Viral mRNA in a Sample.” 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.

Note 12 — Commitment

     In February 2005, the Company entered into a Supply and Purchase Agreement with F. Hoffman-La Roche Ltd. and its affiliate Roche Molecular Systems, Inc. (“Roche”). Under this agreement, Roche will manufacture and supply DNA probes for human papillomavirus (“HPV”) to Gen-Probe. The Company will use these probes in molecular diagnostic assays. Pursuant to the agreement, the Company will pay Roche manufacturing fees of $20.0 million within 90 days of February 15, 2005 and $10.0

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million within 10 days of the occurrence of certain future commercial events. The Company also agreed to pay Roche transfer fees for the HPV products.

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 our March 31, 2005 consolidated financial statements and related notes thereto included elsewhere in this quarterly report and with our consolidated financial statements and notes thereto for the year ended December 31, 2004 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, 2004. We also urge you to review and consider our disclosures describing various risks that may affect our business, which are set forth under the heading “Risk Factors” in this report and in our Annual Report on Form 10-K for the year ended December 31, 2004.

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 the three months ended March 31, 2005, we achieved strong financial results. Product sales for the current period were $59.6 million, compared to $55.0 million in the same period of the prior year, an increase of 8%. Net income for the current period was $13.5 million ($0.26 per diluted share), compared to $19.7 million ($0.39 per diluted share) in the same period of the prior year, a decrease of 33%. Total revenues for the current period were $68.8 million, compared to $76.5 million in the same period of the prior year, a decrease of 10%. The prior year period’s net income and total revenues included a contract milestone of $6.5 million from Bayer (on behalf of 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 during the first quarter of last year.

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

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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 $3.0 million by the end of 2006. Further, we will receive royalties on the sale of any products developed by bioMérieux using our intellectual property.

     In January 2005, we also entered into a license ag