##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 2006
 OR
 o
    
    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 0-28194
 DIGENE CORPORATION
  Delaware
    
    52-1536128(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 1201 Clopper RoadGaithersburg, Maryland
    
    20878(Address of principal executive offices)
    
    (Zip Code)
 (301) 944-7000
  þ o
  o þ o
 o þ
  Shares outstanding as ofClass
    
    January 30, 2007(Common Stock, par value $.01 per share)
    
    24,009,636




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##### 



DIGENE CORPORATION
 INDEX TO FORM 10-Q
 PagePart I. Consolidated Financial Information:Item 1. Consolidated Financial StatementsConsolidated Balance Sheets- December 31, 2006 and June 30, 2006
    
    
    3Consolidated Statements of Operations- Three and six months ended December 31, 2006 and 2005
    
    
    4Consolidated Statements of Cash Flows- Six months ended December 31, 2006 and 2005
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    21Part II. Other Information:Item 1. Legal Proceedings
    
    
    22Item 6. Exhibits
    
    
    24SignaturesExhibit Index
 2




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##### 



PART I. Consolidated Financial Information
 Item 1. Consolidated Financial Statements
 DIGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
 December 31,
    
    
    June 30,2006
    
    
    2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    8,381
    
    
    $
    8,805Short-term investments
    
    
    164,949
    
    
    
    130,452Accounts receivable, less allowance of approximately $370 and $363
at December 31, 2006 and June 30, 2006, respectively
    
    
    26,818
    
    
    
    27,665Inventories, net
    
    
    7,550
    
    
    
    6,307Prepaid expenses and other current assets
    
    
    3,364
    
    
    
    3,718Deferred tax asset, current
    
    
    4,001
    
    
    
    4,275Total current assets
    
    
    215,063
    
    
    
    181,222Property and equipment, net
    
    
    40,216
    
    
    
    33,935Deposits and other assets
    
    
    5,626
    
    
    
    5,981Deferred tax asset, less current portion
    
    
    12,804
    
    
    
    10,748Total assets
    
    $
    273,709
    
    
    $
    231,886LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    12,761
    
    
    $
    10,716Accrued expenses
    
    
    9,992
    
    
    
    11,030Accrued payroll
    
    
    10,034
    
    
    
    11,190Current portion of long-term debt and lease obligations
    
    
    1,789
    
    
    
    1,445Total current liabilities
    
    
    34,576
    
    
    
    34,381Deferred rent
    
    
    280
    
    
    
    246Long-term debt, less current portion
    
    
    390
    
    
    
    450Lease obligations, less current portion
    
    
    22,920
    
    
    
    19,323Minority interest
    
    
    436
    
    
    
    440Stockholders equity:Preferred stock, $0.10 par value, 1,000,000 shares authorized, no shares
issued and outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 50,000,000 shares authorized, 23,933,381
and 23,243,586 shares issued at December 31, 2006
and June 30, 2006, respectively
    
    
    239
    
    
    
    232Additional paid-in capital
    
    
    256,382
    
    
    
    229,996Accumulated other comprehensive income
    
    
    1,381
    
    
    
    692Accumulated deficit
    
    
    (42,645
    )
    
    
    (53,874
    )Common stock held in treasury, at cost
    
    
    (250
    )
    
    
    Total stockholders equity
    
    
    215,107
    
    
    
    177,046Total liabilities and stockholders equity
    
    $
    273,709
    
    
    $
    231,886
 See accompanying notes.
 3




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##### 



DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(Unaudited)
    
    
    (Unaudited)Revenues:Product sales
    
    $
    48,648
    
    
    $
    36,560
    
    
    $
    94,127
    
    
    $
    69,382Other
    
    
    503
    
    
    
    533
    
    
    
    1,165
    
    
    
    1,064Total revenues
    
    
    49,151
    
    
    
    37,093
    
    
    
    95,292
    
    
    
    70,446Costs and expenses:Cost of product sales
    
    
    6,450
    
    
    
    5,083
    
    
    
    12,588
    
    
    
    9,984Royalty and technology
    
    
    2,609
    
    
    
    2,091
    
    
    
    4,817
    
    
    
    3,953Research and development
    
    
    6,269
    
    
    
    3,852
    
    
    
    10,875
    
    
    
    7,617Selling and marketing
    
    
    17,807
    
    
    
    13,840
    
    
    
    34,210
    
    
    
    28,426General and administrative
    
    
    8,741
    
    
    
    6,316
    
    
    
    18,359
    
    
    
    11,864Income from operations
    
    
    7,275
    
    
    
    5,911
    
    
    
    14,443
    
    
    
    8,602Other income (expense):Interest income
    
    
    2,058
    
    
    
    686
    
    
    
    3,812
    
    
    
    971Interest expense
    
    
    (529
    )
    
    
    (167
    )
    
    
    (883
    )
    
    
    (164
    )Other income (expense)
    
    
    27
    
    
    
    (70
    )
    
    
    41
    
    
    
    (45
    )Income from operations before
minority interest and income taxes
    
    
    8,831
    
    
    
    6,360
    
    
    
    17,413
    
    
    
    9,364Minority interest
    
    
    77
    
    
    
    (4
    )
    
    
    5
    
    
    
    (116
    )Income from operations before
income taxes
    
    
    8,908
    
    
    
    6,356
    
    
    
    17,418
    
    
    
    9,248Provision for income taxes
    
    
    2,819
    
    
    
    3,350
    
    
    
    6,188
    
    
    
    4,924Net income
    
    $
    6,089
    
    
    $
    3,006
    
    
    $
    11,230
    
    
    $
    4,324Basic net income per share
    
    $
    0.26
    
    
    $
    0.14
    
    
    $
    0.48
    
    
    $
    0.21Diluted net income per share
    
    $
    0.25
    
    
    $
    0.14
    
    
    $
    0.47
    
    
    $
    0.21Weighted average shares outstandingBasic
    
    
    23,795
    
    
    
    21,094
    
    
    
    23,620
    
    
    
    20,592Diluted
    
    
    24,181
    
    
    
    21,409
    
    
    
    24,030
    
    
    
    20,938
 See accompanying notes.
 4




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##### 



DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Six Months EndedDecember 31,2006
    
    
    2005(Unaudited)Operating activitiesNet income
    
    $
    11,230
    
    
    $
    4,324Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization of property and equipment
    
    
    3,358
    
    
    
    1,980Amortization of intangible assets
    
    
    250
    
    
    
    Loss on disposal of fixed assets
    
    
    76
    
    
    
    68Stock-based compensation expense
    
    
    3,692
    
    
    
    2,783Deferred tax asset
    
    
    2,841
    
    
    
    3,501Minority interest
    
    
    (5
    )
    
    
    61Changes in operating assets and liabilities:Accounts receivable
    
    
    (341
    )
    
    
    (1,288
    )Inventories
    
    
    (1,213
    )
    
    
    (326
    )Prepaid expenses and other current assets
    
    
    395
    
    
    
    (369
    )Deposits and other assets
    
    
    117
    
    
    
    (248
    )Accounts payable
    
    
    (1
    )
    
    
    (251
    )Accrued expenses
    
    
    (1,282
    )
    
    
    2,299Accrued patent litigation settlement
    
    
    
    
    
    
    (7,500
    )Accrued payroll
    
    
    (1,219
    )
    
    
    133Deferred rent
    
    
    35
    
    
    
    42Net cash provided by operating activities
    
    
    17,933
    
    
    
    5,209Investing activitiesPurchases of short-term investments
    
    
    (133,402
    )
    
    
    (89,259
    )Sales and maturities of short-term investments
    
    
    99,227
    
    
    
    16,227Capital expenditures
    
    
    (7,396
    )
    
    
    (2,082
    )Net cash used in investing activities
    
    
    (41,571
    )
    
    
    (75,114
    )Financing activitiesNet proceeds from issuance of common stock
    
    
    
    
    
    
    60,079Proceeds from issuance of common stock under equity incentive plans
    
    
    15,140
    
    
    
    1,897Excess tax benefit from stock-based compensation
    
    
    2,816
    
    
    
    601Purchases of common stock for treasury
    
    
    (250
    )
    
    
    Principal payments of long-term debt
    
    
    (604
    )
    
    
    (152
    )Proceeds from lease financing
    
    
    5,800
    
    
    
    Net cash provided by financing activities
    
    
    22,902
    
    
    
    62,425Effect of currency translations
    
    
    312
    
    
    
    (197
    )Net decrease in cash and cash equivalents
    
    
    (424
    )
    
    
    (7,677
    )Cash and cash equivalents at beginning of period
    
    
    8,805
    
    
    
    15,789Cash and cash equivalents at end of period
    
    $
    8,381
    
    
    $
    8,112
 See accompanying notes.
 5




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DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation
    2. Recent Accounting Pronouncements
   6




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3. Other Balance Sheet Information
 Inventories
  December 31,
    
    
    June 30,2006
    
    
    2006(unaudited)Finished goods
    
    $
    3,898
    
    
    $
    4,204Work in process
    
    
    3,348
    
    
    
    2,739Raw materials
    
    
    2,266
    
    
    
    1,7739,512
    
    
    
    8,716Inventory reserve
    
    
    (1,962
    )
    
    
    (2,409
    )$
    7,550
    
    
    $
    6,307
 4. Income Taxes
   7




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5. Stockholders Equity
 Common Stock and Per Share Calculation
   Three Months Ended
    
    Six Months EndedDecember 31,
    
    December 31(in thousands, except per share data)
    
    2006
    
    2005
    
    2006
    
    2005Numerator:Net income
    
    $
    6,089
    
    
    $
    3,006
    
    
    $
    11,230
    
    
    $
    4,324Denominator:Weighted average shares outstanding  basic
    
    
    23,795
    
    
    
    21,094
    
    
    
    23,620
    
    
    
    20,592Dilutive securities  stock options
    
    
    386
    
    
    
    315
    
    
    
    410
    
    
    
    346Weighted average shares outstanding  diluted
    
    
    24,181
    
    
    
    21,409
    
    
    
    24,030
    
    
    
    20,938Basic net income per share
    
    $
    0.26
    
    
    $
    0.14
    
    
    $
    0.48
    
    
    $
    0.21Diluted net income per share
    
    $
    0.25
    
    
    $
    0.14
    
    
    $
    0.47
    
    
    $
    0.21
   Stock-Based Compensation
  8




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9




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Comprehensive Income
  Three Months Ended
    
    Six Months EndedDecember 31,
    
    December 31,2006
    
    2005
    
    2006
    
    2005Net income as reported
    
    $
    6,089
    
    
    $
    3,006
    
    
    $
    11,230
    
    
    $
    4,324Other comprehensive income:Unrealized gain on available-for-sale securities, net of taxes
    
    
    53
    
    
    
    5
    
    
    
    201
    
    
    
    Foreign currency translation gain (loss)
    
    
    351
    
    
    
    (230
    )
    
    
    488
    
    
    
    (265
    )Comprehensive income
    
    $
    6,493
    
    
    $
    2,781
    
    
    $
    11,919
    
    
    $
    4,059
  6. Warranties
  Six Months Ended December 31,2006
    
    
    2005Balance, beginning of period
    
    $
    1,503
    
    
    $
    1,137Warranties issued during the period
    
    
    1,891
    
    
    
    1,375Changes in liability for pre-existing warranties during the period
    
    
    (1,688
    )
    
    
    (1,236
    )Balance, end of period
    
    $
    1,706
    
    
    $
    1,276
  7. Contingencies
  10




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
  Overview
     11




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##### 



Results of Operations
 Three Months Ended December 31,
    
    Six Months Ended December 31,2006
    
    2005
    
    % change
    
    2006
    
    2005
    
    % change(in thousands)Total revenue
    
    $
    49,151
    
    
    $
    37,093
    
    
    
    33
    %
    
    $
    95,292
    
    
    $
    70,446
    
    
    
    35
    %Product sales
    
    
    48,648
    
    
    
    36,560
    
    
    
    33
    %
    
    
    94,127
    
    
    
    69,382
    
    
    
    36
    %HPV test product revenue
    
    
    45,220
    
    
    
    32,302
    
    
    
    40
    %
    
    
    86,826
    
    
    
    60,694
    
    
    
    43
    %Cost of product sales
    
    
    6,450
    
    
    
    5,083
    
    
    
    27
    %
    
    
    12,588
    
    
    
    9,984
    
    
    
    26
    %Gross margin (1)
    
    
    86.7
    %
    
    
    86.1
    %
    
    
    1
    %
    
    
    86.6
    %
    
    
    85.6
    %
    
    
    1
    %Royalty and technology expense
    
    $
    2,609
    
    
    $
    2,091
    
    
    
    25
    %
    
    $
    4,817
    
    
    $
    3,953
    
    
    
    22
    %
 
 (1)
    
    We calculate gross margin as the difference between product sales and the cost of product sales, which exclude royalty and
technology fees, as a percentage of product sales for the period.  12




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® ®
    13




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14




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15




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16




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17




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Liquidity and Capital Resources
     18




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19




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##### 



Contractual Obligations
  Less Than
    
    
    One to Three
    
    
    Four to FiveContractual Obligations
    
    Total
    
    
    One Year
    
    
    Years
    
    
    Years
    
    
    After Five YearsLong-term debt
    
    $
    508
    
    
    $
    118
    
    
    $
    390
    
    
    $
    
    
    
    $
    Operating leases
    
    
    3,032
    
    
    
    861
    
    
    
    1,523
    
    
    
    595
    
    
    
    53Capital leases
    
    
    231
    
    
    
    108
    
    
    
    123
    
    
    
    
    
    
    
    Purchase obligations
    
    
    3,845
    
    
    
    2,595
    
    
    
    1,250
    
    
    
    
    
    
    
    Gaithersburg lease
obligation
    
    
    40,972
    
    
    
    3,851
    
    
    
    12,062
    
    
    
    8,488
    
    
    
    16,571Executive severance
    
    
    1,324
    
    
    
    774
    
    
    
    550
    
    
    
    
    
    
    
    Minimum royalty payments
    
    
    10,500
    
    
    
    3,500
    
    
    
    7,000
    
    
    
    
    
    
    
    Total contractual cash
obligations
    
    $
    60,412
    
    
    $
    11,807
    
    
    $
    22,898
    
    
    $
    9,083
    
    
    $
    16,624
 20




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Item 4. Controls and Procedures
   21




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##### 



PART II. Other Information
 Item 1. Legal Proceedings
 Digene Corporation v. Ventana Medical Systems, Inc. and Beckman Coulter, Inc.
    22




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##### 



Digene Corporation v. F.Hoffmann-LaRoche Ltd. and Roche Molecular Systems, Inc.
   Digene Corporation v. Third Wave Technologies, Inc.
  Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.
  Issuer
Purchases of Equity Securities
 Period
    
    (a) Total Number of Shares Purchased(1)
    
    (b) Average Price Paid per Share
    

(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
    
    (d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or ProgramsOctober 1, 2006 - October 31, 2006
    
    
    5,279
    
    
    $
    47.49
    
    
    
    N/A
    
    
    
    N/ANovember 1, 2006 - November 30, 2006
    
    
    0
    
    
     $
    0
    
    
    
    N/A
    
    
    
    N/ADecember 1, 2006 - December 31, 2006
    
    
    0
    
    
    $
    0
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    5,279
    
    
    $
    47.49
    
    
    
    N/A
    
    
    
    N/A
 
  23




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##### 



Item 6. Exhibits
 Exhibit No.
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to
Digenes Registration Statement on Form S-1 (File No. 333-02968)).3.2
    
    Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.1 to Digenes Current Report
on Form 8-K filed on December 14, 2006).4.1
    
    Form of Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to Digenes
Registration Statement on Form S-1 (File No. 333-02968)).10.1
    
    Employment Agreement, dated
November 13, 2006, between the Company and Daryl J. Faulkner.10.2
    
    Change in Control Employment Agreement, dated December 11, 2006, between the Company and Daryl J.
Faulkner.31.1
    
    Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.31.2
    
    Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer.32
    
    Certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.
 24




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##### 



SIGNATURES
  DIGENE CORPORATIONDate: February 2, 2007
    By:
    /s/ Joseph P. SlatteryJoseph P. SlatteryChief Financial Officer and Senior Vice President
(Principal Financial Officer and
Principal Accounting Officer)




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##### 



EXHIBIT INDEX
 Exhibit No.
    
    
    
    Description3.1
    
    
    
    Amended and Restated Certificate of Incorporation of
Digene (Incorporated by reference to Exhibit 3.1 to
Digenes Registration Statement on Form S-1 (File No.
333-2968) dated March 29, 1996).3.2
    
    
    
    Amended and Restated Bylaws of Digene (Incorporated
by reference to Exhibit 3.1 to Digenes Current
Report on Form 8-K filed on December 14, 2006).4.1
    
    
    
    Specimen Common Stock Certificate (Incorporated by
reference to Exhibit 4.1 to Digenes Registration
Statement on Form S-1 (File No. 333-2968) dated March
29, 1996).10.1
    
    *
    
    Employment Agreement, dated
November 13, 2006,
between the Company and Daryl J. Faulkner.10.2
    
    *
    
    Change in Control Employment Agreement, dated
December 11, 2006, between the Company and Daryl J.
Faulkner.10.8
    
    
    
    Non-Employee Director Compensation Policy
(incorporated by reference to Exhibit 10.1 to
Digenes Current Report on Form 8-K filed on October
31, 2006).31.1
    
    *
    
    Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief
Executive Officer.31.2
    
    *
    
    Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief
Financial Officer.32
    
    *
    
    Certification pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code.
 
 *
    
    Filed herewith.