##### 



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 March 31, 2007
 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
    
    May 3, 2007(Common Stock, par value $.01 per share)
    
    24,404,087




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##### 



DIGENE CORPORATION
 INDEX TO FORM 10-Q
 PagePart I. Consolidated Financial Information:Item 1. Consolidated Financial StatementsConsolidated Balance Sheets-March 31, 2007 and June 30, 2006
    
    
    3Consolidated Statements of Operations-Three and nine months ended March 31, 2007 and 2006
    
    
    4Consolidated Statements of Cash Flows-Nine months ended March 31, 2007 and 2006
    
    
    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
    
    
    25SignaturesExhibit Index
 2




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##### 



PART I. Consolidated Financial Information
Item 1. Consolidated Financial Statements
 DIGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    June 30,2007
    
    
    2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13,042
    
    
    $
    8,805Short-term investments
    
    
    179,722
    
    
    
    130,452Accounts receivable, less allowance of approximately $390 and $363
at March 31, 2007 and June 30, 2006, respectively
    
    
    29,471
    
    
    
    27,665Inventories, net
    
    
    8,715
    
    
    
    6,307Prepaid expenses and other current assets
    
    
    3,358
    
    
    
    3,718Deferred tax asset, current
    
    
    3,721
    
    
    
    4,275Total current assets
    
    
    238,029
    
    
    
    181,222Property and equipment, net
    
    
    40,755
    
    
    
    33,935Deposits and other assets
    
    
    5,542
    
    
    
    5,981Deferred tax asset, less current portion
    
    
    14,666
    
    
    
    10,748Total assets
    
    $
    298,992
    
    
    $
    231,886LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    14,616
    
    
    $
    10,716Accrued expenses
    
    
    10,050
    
    
    
    11,030Accrued payroll
    
    
    11,676
    
    
    
    11,190Current portion of long-term debt and lease obligations
    
    
    1,850
    
    
    
    1,445Total current liabilities
    
    
    38,192
    
    
    
    34,381Deferred rent
    
    
    293
    
    
    
    246Long-term debt, less current portion
    
    
    361
    
    
    
    450Lease obligation, less current portion
    
    
    22,447
    
    
    
    19,323Minority interest
    
    
    511
    
    
    
    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,
24,289,887 and 23,243,586 shares issued and outstanding at March
31, 2007 and June 30, 2006, respectively
    
    
    243
    
    
    
    232Additional paid-in capital
    
    
    272,806
    
    
    
    229,996Accumulated other comprehensive income
    
    
    1,451
    
    
    
    692Accumulated deficit
    
    
    (37,312
    )
    
    
    (53,874
    )Total stockholders equity
    
    
    237,188
    
    
    
    177,046Total liabilities and stockholders equity
    
    $
    298,992
    
    
    $
    231,886
 See accompanying notes.
 3




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##### 



DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006(Unaudited)
    
    
    (Unaudited)Revenues:Product sales
    
    $
    52,068
    
    
    $
    38,533
    
    
    $
    146,196
    
    
    $
    107,915Other
    
    
    455
    
    
    
    597
    
    
    
    1,619
    
    
    
    1,661Total revenues
    
    
    52,523
    
    
    
    39,130
    
    
    
    147,815
    
    
    
    109,576Costs and expenses:Cost of product sales
    
    
    7,169
    
    
    
    5,585
    
    
    
    19,756
    
    
    
    15,569Royalty and technology
    
    
    2,738
    
    
    
    1,562
    
    
    
    7,555
    
    
    
    5,515Research and development
    
    
    7,238
    
    
    
    5,641
    
    
    
    18,113
    
    
    
    13,258Selling and marketing
    
    
    18,507
    
    
    
    16,343
    
    
    
    52,718
    
    
    
    44,770General and administrative
    
    
    9,922
    
    
    
    7,472
    
    
    
    28,281
    
    
    
    19,335Income from operations
    
    
    6,949
    
    
    
    2,527
    
    
    
    21,392
    
    
    
    11,129Other income (expense):Interest income
    
    
    2,298
    
    
    
    1,277
    
    
    
    6,109
    
    
    
    2,248Interest expense
    
    
    (349
    )
    
    
    (318
    )
    
    
    (1,231
    )
    
    
    (482
    )Other income (expense)
    
    
    95
    
    
    
    35
    
    
    
    136
    
    
    
    (10
    )Income from operations before
minority interest and income taxes
    
    
    8,993
    
    
    
    3,521
    
    
    
    26,406
    
    
    
    12,885Minority interest
    
    
    (131
    )
    
    
    5
    
    
    
    (126
    )
    
    
    (111
    )Income from operations before
income taxes
    
    
    8,862
    
    
    
    3,526
    
    
    
    26,280
    
    
    
    12,774Provision for income taxes
    
    
    3,529
    
    
    
    2,421
    
    
    
    9,717
    
    
    
    7,345Net income
    
    $
    5,333
    
    
    $
    1,105
    
    
    $
    16,563
    
    
    $
    5,429Basic net income per share
    
    $
    0.22
    
    
    $
    0.05
    
    
    $
    0.70
    
    
    $
    0.25Diluted net income per share
    
    $
    0.21
    
    
    $
    0.05
    
    
    $
    0.68
    
    
    $
    0.25Weighted average shares outstandingBasic
    
    
    24,157
    
    
    
    22,737
    
    
    
    23,797
    
    
    
    21,297Diluted
    
    
    24,836
    
    
    
    23,380
    
    
    
    24,296
    
    
    
    21,742
 See accompanying notes.
 4




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DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Nine Months EndedMarch 312007
    
    
    2006(Unaudited)Operating activitiesNet income
    
    $
    16,563
    
    
    $
    5,429Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization of property and equipment
    
    
    5,205
    
    
    
    3,367Amortization of intangible assets
    
    
    375
    
    
    
    Loss on disposal of fixed assets
    
    
    105
    
    
    
    127Stock-based compensation expense
    
    
    4,875
    
    
    
    4,193Deferred tax asset
    
    
    5,871
    
    
    
    3,474Minority interest
    
    
    69
    
    
    
    57Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,901
    )
    
    
    (2,912
    )Inventories
    
    
    (2,363
    )
    
    
    817Prepaid expenses and other current assets
    
    
    410
    
    
    
    (521
    )Deposits and other assets
    
    
    78
    
    
    
    (150
    )Accounts payable
    
    
    2,597
    
    
    
    1,136Accrued expenses
    
    
    (1,648
    )
    
    
    3,029Accrued patent litigation settlement
    
    
    
    
    
    
    (7,500
    )Accrued payroll
    
    
    405
    
    
    
    2,160Deferred rent
    
    
    48
    
    
    
    (535
    )Net cash provided by operating activities
    
    
    29,689
    
    
    
    12,171Investing activitiesPurchases of short-term investments
    
    
    (231,181
    )
    
    
    (189,487
    )Sales and maturities of short-term investments
    
    
    182,235
    
    
    
    92,427Capital expenditures
    
    
    (10,019
    )
    
    
    (3,566
    )Net cash used in investing activities
    
    
    (58,965
    )
    
    
    (100,626
    )Financing activitiesNet proceeds from issuance of common stock
    
    
    
    
    
    
    60,079Proceeds from issuance of common stock under equity incentive
plans
    
    
    25,444
    
    
    
    15,466Excess tax benefit from stock-based compensation
    
    
    3,145
    
    
    
    2,837Principal payments of long-term debt
    
    
    (1,160
    )
    
    
    (376
    )Proceeds from lease financing
    
    
    5,800
    
    
    
    Net cash provided by financing activities
    
    
    33,229
    
    
    
    78,006Effect of currency translations
    
    
    284
    
    
    
    (208
    )Net increase (decrease) in cash and cash equivalents
    
    
    4,237
    
    
    
    (10,657
    )Cash and cash equivalents at beginning of period
    
    
    8,805
    
    
    
    15,789Cash and cash equivalents at end of period
    
    $
    13,042
    
    
    $
    5,132
 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
  March 31,
    
    
    June 30,2007
    
    
    2006(unaudited)Finished goods
    
    $
    4,152
    
    
    $
    4,204Work in process
    
    
    4,343
    
    
    
    2,739Raw materials
    
    
    2,508
    
    
    
    1,77311,003
    
    
    
    8,716Inventory reserve
    
    
    (2,288
    )
    
    
    (2,409
    )$
    8,715
    
    
    $
    6,307
 4. Income Taxes
   7




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5. Stockholders Equity
 Common Stock and Per Share Calculation
   Three Months Ended
    
    Nine Months EndedMarch 31,
    
    March 31,(in thousands, except per share data)
    
    2007
    
    2006
    
    2007
    
    2006Numerator:Net income
    
    $
    5,333
    
    
    $
    1,105
    
    
    $
    16,563
    
    
    $
    5,429Denominator:Weighted average shares outstanding  basic
    
    
    24,157
    
    
    
    22,737
    
    
    
    23,797
    
    
    
    21,297Dilutive securities  stock options
    
    
    679
    
    
    
    643
    
    
    
    499
    
    
    
    445Weighted average shares outstanding  diluted
    
    
    24,836
    
    
    
    23,380
    
    
    
    24,296
    
    
    
    21,742Basic net income per share
    
    $
    0.22
    
    
    $
    0.05
    
    
    $
    0.70
    
    
    $
    0.25Diluted net income per share
    
    $
    0.21
    
    
    $
    0.05
    
    
    $
    0.68
    
    
    $
    0.25
   8




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Stock-Based Compensation
       9




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Comprehensive Income
  Three Months Ended March 31,
    
    Nine Months Ended March 31,2007
    
    2006
    
    2007
    
    2006Net income, as reported
    
    $
    5,333
    
    
    $
    1,105
    
    
    $
    16,563
    
    
    $
    5,429Other comprehensive income:Unrealized gain (loss)
on available-for-sale
securities, net of
taxes
    
    
    1
    
    
    
    (64
    )
    
    
    202
    
    
    
    (64
    )Foreign currency
translation gain (loss)
    
    
    68
    
    
    
    85
    
    
    
    557
    
    
    
    (181
    )Comprehensive income
    
    $
    5,402
    
    
    $
    1,126
    
    
    $
    17,322
    
    
    $
    5,184
  6. Warranties
  Nine Months Ended March 31,2007
    
    
    2006Balance, beginning of period
    
    $
    1,503
    
    
    $
    1,137Warranties issued during the period
    
    
    2,936
    
    
    
    2,145Changes in liability for pre-existing warranties during the period
    
    
    (2,613
    )
    
    
    (1,922
    )Balance, end of period
    
    $
    1,826
    
    
    $
    1,360
  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 March 31,
    
    Nine Months Ended March 31,2007
    
    2006
    
    change
    
    2007
    
    2006
    
    change(in thousands, exceptgross margin)Total revenue
    
    $
    52,523
    
    
    $
    39,130
    
    
    
    34
    %
    
    $
    147,815
    
    
    $
    109,576
    
    
    
    35
    %Product sales
    
    
    52,068
    
    
    
    38,533
    
    
    
    35
    %
    
    
    146,196
    
    
    
    107,915
    
    
    
    35
    %HPV test product revenue
    
    
    48,335
    
    
    
    34,244
    
    
    
    41
    %
    
    
    135,162
    
    
    
    94,938
    
    
    
    42
    %Cost of product sales
    
    
    7,169
    
    
    
    5,585
    
    
    
    28
    %
    
    
    19,756
    
    
    
    15,569
    
    
    
    27
    %Gross margin (1)
    
    
    86.2
    %
    
    
    85.5
    %
    
    
    1
    %
    
    
    86.5
    %
    
    
    85.6
    %
    
    
    1
    %Royalty and technology
expense
    
    $
    2,738
    
    
    $
    1,562
    
    
    
    75
    %
    
    $
    7,555
    
    
    $
    5,515
    
    
    
    37
    %
 
 (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
  Contractual Obligations
    
    Total
    
    
    Less Than One Year
    
    
    One to Three Years
    
    
    Four to Five Years
    
    
    After Five YearsLong-term debt
    
    $
    479
    
    
    $
    118
    
    
    $
    361
    
    
    $
    
    
    
    $
    Operating leases
    
    
    3,081
    
    
    
    975
    
    
    
    1,542
    
    
    
    542
    
    
    
    22Capital leases
    
    
    198
    
    
    
    102
    
    
    
    96
    
    
    
    
    
    
    
    Executive severance
    
    
    2,820
    
    
    
    2,436
    
    
    
    384Purchase obligations
    
    
    1,963
    
    
    
    1,963
    
    
    
    
    
    
    
    
    
    
    
    Gaithersburg lease
obligation
    
    
    39,770
    
    
    
    3,849
    
    
    
    12,056
    
    
    
    8,484
    
    
    
    15,381Minimum royalty payments
    
    
    9,591
    
    
    
    2,591
    
    
    
    7,000
    
    
    
    
    
    
    
    Total contractual cash
obligations
    
    $
    57,902
    
    
    $
    12,034
    
    
    $
    21,439
    
    
    $
    9,026
    
    
    $
    15,403
 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.
    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 April 11, 2007).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
    
    Amended and Restated Employment Agreement, dated March 7, 2007, and
effective March 13, 2007, between Digene and Attila T. Lorincz.10.2
    
    Transition Agreement, dated November 22, 2006, between Digene and Evan Jones.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:
May 9, 2007
    
    By:
    
    /s/ Joseph P. SlatteryJoseph P. SlatteryChief Financial Officer and Senior Vice President(Principal Financial Officer andPrincipal Accounting Officer)
 25




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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 April 11, 2007).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
    
    *
    
    Amended and Restated Employment Agreement, dated
March 7, 2007, and effective March 13, 2007, between
Digene and Attila T. Lorincz.10.2
    
    *
    
    Transition Agreement, dated November 22, 2006,
between Digene and Evan Jones.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.