##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One)þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the quarterly period ended March 31, 2005ORo
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 Commission File Number 0-21872 GEN-PROBE INCORPORATED  Delaware
    
    33-0044608(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)10210 Genetic Center DriveSan Diego, CA
    
    92121(Address of Principal Executive Offices)
    
    (Zip Code)
 (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.   1




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GEN-PROBE INCORPORATED TABLE OF CONTENTS
FORM 10-Q PagePART IItem 1. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    36Item 4. Controls and Procedures
    
    
    36PART IIItem 1. Legal Proceedings
    
    
    36Item 6. Exhibits
    
    
    42SIGNATURES
    
    
    44EXHIBIT 10.79EXHIBIT 10.80EXHIBIT 10.81EXHIBIT 10.82EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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GEN-PROBE INCORPORATED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) March 31,
    
    
    December 31,2005
    
    
    2004(unaudited)Current assets:Cash and cash equivalents
    
    $
    32,332
    
    
    $
    25,498Short-term investments
    
    
    180,498
    
    
    
    168,328Trade accounts receivable, net of
allowance for doubtful accounts of $730
at March 31, 2005 and $664 at December
31, 2004, respectively
    
    
    26,751
    
    
    
    21,990Accounts receivable  other
    
    
    475
    
    
    
    3,136Inventories
    
    
    28,132
    
    
    
    27,308Deferred income taxes
    
    
    8,188
    
    
    
    7,725Prepaid expenses
    
    
    17,269
    
    
    
    11,910Other current assets
    
    
    2,493
    
    
    
    2,054Total current assets
    
    
    296,138
    
    
    
    267,949Property, plant and equipment, net
    
    
    82,998
    
    
    
    76,651Capitalized software
    
    
    22,837
    
    
    
    23,466Goodwill
    
    
    18,621
    
    
    
    18,621Other assets
    
    
    25,121
    
    
    
    24,395Total assets
    
    $
    445,715
    
    
    $
    411,082Current liabilities:Accounts payable
    
    
    12,694
    
    
    
    6,729Accrued salaries and employee benefits
    
    
    11,659
    
    
    
    11,912Other accrued expenses
    
    
    3,939
    
    
    
    4,451Income tax payable
    
    
    4,021
    
    
    
    1,188Deferred revenue
    
    
    11,930
    
    
    
    9,467Total current liabilities
    
    
    44,243
    
    
    
    33,747Deferred income taxes
    
    
    9,187
    
    
    
    9,187Deferred revenue
    
    
    4,833
    
    
    
    5,000Deferred rent
    
    
    299
    
    
    
    309Minority interest
    
    
    1,776
    
    
    
    1,810Commitments and contingenciesStockholders 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,
50,442,131 and 50,035,490 shares issued
and outstanding at March 31, 2005 and
December 31, 2004, respectively
    
    
    5
    
    
    
    5Additional paid-in capital
    
    
    260,198
    
    
    
    248,767Deferred compensation
    
    
    (1,014
    )
    
    
    (1,104
    )Accumulated other comprehensive income
    
    
    173
    
    
    
    807Retained earnings
    
    
    126,015
    
    
    
    112,554Total stockholders equity
    
    
    385,377
    
    
    
    361,029Total liabilities and stockholders equity
    
    $
    445,715
    
    
    $
    411,082
 See accompanying notes to consolidated financial statements. 3




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##### Table of Contents



GEN-PROBE INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) Three Months EndedMarch 31,2005
    
    
    2004(unaudited)
    
    
    (unaudited)Revenues:Product sales
    
    $
    59,579
    
    
    $
    55,030Collaborative research revenue
    
    
    6,344
    
    
    
    6,731Royalty and license revenue
    
    
    2,905
    
    
    
    14,725Total revenues
    
    
    68,828
    
    
    
    76,486Operating expenses:Cost of product sales
    
    
    15,498
    
    
    
    13,864Research and development
    
    
    18,683
    
    
    
    18,419Marketing and sales
    
    
    7,426
    
    
    
    6,812General and administrative
    
    
    7,191
    
    
    
    7,283Total operating expenses
    
    
    48,798
    
    
    
    46,378Income from operations
    
    
    20,030
    
    
    
    30,108Total other income, net
    
    
    1,081
    
    
    
    677Income before income taxes
    
    
    21,111
    
    
    
    30,785Income tax expense
    
    
    7,650
    
    
    
    11,057Net income
    
    $
    13,461
    
    
    $
    19,728Net income per shareBasic
    
    $
    0.27
    
    
    $
    0.40Diluted
    
    $
    0.26
    
    
    $
    0.39Weighted average shares outstandingBasic
    
    
    50,282
    
    
    
    48,904Diluted
    
    
    52,367
    
    
    
    50,998
 See accompanying notes to consolidated financial statements. 4




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GEN-PROBE INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Three Months EndedMarch 31,2005
    
    
    2004(unaudited)
    
    
    (unaudited)Operating activitiesNet income
    
    $
    13,461
    
    
    $
    19,728Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    5,413
    
    
    
    3,930Stock compensation charges
    
    
    125
    
    
    
    109Loss on disposal of property and equipment
    
    
    39
    
    
    
    9Deferred rent
    
    
    (10
    )
    
    
    (6
    )Stock option income tax benefits
    
    
    4,692
    
    
    
    1,585Deferred revenue
    
    
    2,296
    
    
    
    (16
    )Deferred income taxes
    
    
    (465
    )
    
    
    1,071Minority interest
    
    
    (58
    )
    
    
    (47
    )Changes in assets and liabilities:Accounts receivable
    
    
    (2,070
    )
    
    
    (7,778
    )Inventories
    
    
    (822
    )
    
    
    (3,318
    )Prepaid expenses
    
    
    (5,359
    )
    
    
    (2,526
    )Other current assets
    
    
    (439
    )
    
    
    419Accounts payable
    
    
    5,963
    
    
    
    1,605Accrued salaries and employee benefits
    
    
    (253
    )
    
    
    (2,020
    )Other accrued expenses
    
    
    (525
    )
    
    
    (8
    )Income tax payable
    
    
    2,827
    
    
    
    8,135Net cash provided by operating activities
    
    
    24,815
    
    
    
    20,872Investing activitiesProceeds from sales and maturities of short-term investments
    
    
    20,790
    
    
    
    34,311Purchases of short-term investments
    
    
    (32,900
    )
    
    
    (45,544
    )Purchases of property, plant and equipment
    
    
    (10,228
    )
    
    
    (4,509
    )Capitalization of intangible assets
    
    
    (1,643
    )
    
    
    (345
    )Other assets
    
    
    (791
    )
    
    
    (373
    )Net cash used in investing activities
    
    
    (24,772
    )
    
    
    (16,460
    )Financing activitiesProceeds from issuance of common stock
    
    
    6,705
    
    
    
    5,358Net cash provided by financing activities
    
    
    6,705
    
    
    
    5,358Effect of exchange rate changes on cash and cash equivalents
    
    
    86
    
    
    
    692Net increase in cash and cash equivalents
    
    
    6,834
    
    
    
    10,462Cash and cash equivalents at the beginning of the period
    
    
    25,498
    
    
    
    35,973Cash and cash equivalents at the end of the period
    
    $
    32,332
    
    
    $
    46,435Supplemental disclosure of cash flow information:Cash paid for:Income taxes
    
    $
    78
    
    
    $
    658
 See accompanying notes to consolidated financial statements. 5




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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. 6




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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: Stock Option Plans
    
    
    ESPP2005
    
    
    2004
    
    
    2005
    
    
    2004Risk-free interest rate
    
    
    3.59
    %
    
    
    2.79
    %
    
    
    2.60
    %
    
    
    1.00
    %Volatility
    
    
    59
    %
    
    
    67
    %
    
    
    59
    %
    
    
    59
    %Dividend yield
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Expected life (years)
    
    
    4.0
    
    
    
    4.0
    
    
    
    0.5
    
    
    
    0.5Resulting average fair value
    
    $
    23.60
    
    
    $
    18.99
    
    
    $
    7.63
    
    
    $
    5.46
 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. 7




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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): Three Months EndedMarch 31,2005
    
    
    2004Net income:As reported
    
    $
    13,461
    
    
    $
    19,728Stock-based employee compensation expense
included in reported net income, net of
related tax effects
    
    
    54
    
    
    
    22Total stock-based employee compensation
expense determined under fair value based
method for all options, net of related tax
effects
    
    
    (3,595
    )
    
    
    (1,895
    )Pro forma net income
    
    $
    9,920
    
    
    $
    17,855Net income per share:As reportedBasic
    
    $
    0.27
    
    
    $
    0.40Diluted
    
    $
    0.26
    
    
    $
    0.39Pro formaBasic
    
    $
    0.20
    
    
    $
    0.37Diluted
    
    $
    0.19
    
    
    $
    0.35
 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): Three Months EndedMarch 31,2005
    
    
    2004Net income
    
    $
    13,461
    
    
    $
    19,728Weighted average shares outstanding  Basic
    
    
    50,282
    
    
    
    48,904Effect of dilutive common stock options outstanding
    
    
    2,085
    
    
    
    2,094Weighted average shares outstanding  Diluted
    
    
    52,367
    
    
    
    50,998Net income per share:Basic
    
    $
    0.27
    
    
    $
    0.40Diluted
    
    $
    0.26
    
    
    $
    0.39
 8




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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): Three Months EndedMarch 31,2005
    
    
    2004Net income
    
    $
    13,461
    
    
    $
    19,728Change in unrealized loss on investments
    
    
    (825
    )
    
    
    (196
    )Foreign currency translation adjustment
    
    
    190
    
    
    
    916Comprehensive income
    
    $
    12,826
    
    
    $
    20,448
 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): March 31, 2005
    
    
    December 31, 2004Accumulated
    
    
    
    
    
    
    
    
    
    
    AccumulatedGross
    
    
    Amortization
    
    
    Net
    
    
    Gross
    
    
    Amortization
    
    
    NetIntangible assets subject
to amortization:Capitalized software
    
    $
    25,142
    
    
    $
    2,305
    
    
    $
    22,837
    
    
    $
    25,142
    
    
    $
    1,676
    
    
    $
    23,466Patents
    
    
    15,348
    
    
    
    14,235
    
    
    
    1,113
    
    
    
    15,305
    
    
    
    14,062
    
    
    
    1,243Purchased intangible assets
    
    
    33,636
    
    
    
    32,078
    
    
    
    1,558
    
    
    
    33,636
    
    
    
    31,994
    
    
    
    1,642License fees
    
    
    23,626
    
    
    
    1,410
    
    
    
    22,216
    
    
    
    22,026
    
    
    
    752
    
    
    
    21,274Total
    
    $
    97,752
    
    
    $
    50,028
    
    
    $
    47,724
    
    
    $
    96,109
    
    
    $
    48,484
    
    
    $
    47,625Goodwill
    
    $
    26,298
    
    
    $
    7,677
    
    
    $
    18,621
    
    
    $
    26,298
    
    
    $
    7,677
    
    
    $
    18,621
 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. 9




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Note 8  Inventories Net inventories are comprised of the following (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Raw materials and supplies
    
    $
    5,410
    
    
    $
    5,345Work in process
    
    
    13,226
    
    
    
    10,429Finished goods
    
    
    9,496
    
    
    
    11,534$
    28,132
    
    
    $
    27,308
 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): Balance at December 31, 2004
    
    $
    361,029Net income
    
    
    13,461Other comprehensive income
    
    
    (635
    )Net proceeds from the issuance of common stock
    
    
    6,705Issuance of common stock to board members
    
    
    34Amortization of deferred compensation
    
    
    91Tax benefit from the exercise of stock options
    
    
    4,692Balance at March 31, 2005
    
    $
    385,377
 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 10




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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 gonorrhoeaebacteria from June 1993
through trial. Revenues from tests for the detection of Neisseria gonorrhoeaehave 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 11




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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 12




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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 agreement with Corixa Corporation, or 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, 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 recorded the initial $1.6
million license fee as an intangible asset which is being amortized on a straight-line basis to
research and development expense over the underlying life of the patents. 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. Supply Agreement 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 to
Gen-Probe. 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. Food and Drug Administration, or FDA, during the first quarter of 2005. Approximately
1200 infected units of blood have been intercepted by blood centers using our WNV assay under an
Investigational New Drug, or IND, application 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. Arbitration Award In April 2005, we received a tentative award in our arbitration with Bayer HealthCare, LLC
concerning the parties collaboration for the development and sale of nucleic acid diagnostic tests
for viral organisms. The arbitrator determined that we are entitled to a co-exclusive right to
distribute qualitative TMA assays to detect HCV 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 we requested. As a result of terminating the agreement, we
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.
Further, the arbitrator determined that Bayer will be required to reimburse us $2.0 million for
our legal fees and expenses related to the arbitration proceedings. The tentative decision is
subject to further proceedings and Bayer has a right to appeal the final award to an arbitration
appeal panel. While we expect 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 (See Note 11). 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 collaborative research and development activities and for the products we
provide Chiron prior to regulatory approval. Our royalty and license revenues reflect fees paid to
us by third parties for the use of our proprietary technology. For the three months ended March 31,
2005, product sales, collaborative research revenues and royalty and license revenues equaled 87%,
9% and 4%, respectively, of our total revenues of $68.8 million. For the same 13




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period in the prior year, product sales, collaborative research revenues, and royalty and license revenues equaled 72%,
9%, and 19%, respectively, of our total revenues of $76.5 million. Product sales Our primary source of revenue is the sale of clinical diagnostic and blood screening products
in the United States. Our clinical diagnostic products include our APTIMA Combo 2, PACE 2,
AccuProbe and Amplified Mycobacterium Tuberculosis Direct Test product lines. During the first
quarter of 2005, we shipped approximately 5.4 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 the contractual transfer prices specified in our collaboration
agreement with Chiron for sales to blood bank facilities located in 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 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. For both of the three
month periods ended March 31, 2005 and 2004, we recognized $4.5 million, 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 IND. For the
three months ended March 31 2005, we recognized $0.7 million in reimbursements for expenses
incurred for WNV. There were no reimbursements for WNV during the same period in the prior year. 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. For each of the three month periods ended March 31,
2005 and 2004, we recognized $0.5 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. 14




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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. Any amounts received prior to
satisfying our revenue recognition criteria are recorded as deferred revenue on our balance sheet. 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 this milestone
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 the
three month periods ended March 31, 2005 and 2004, 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 for commercial sale outside the United States 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, are classified as research and
development expense prior to FDA approval. 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 additional costs associated with the manufacture of 15




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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 there have been no significant changes during the three months ended March 31, 2005
to the items that we disclosed as our critical accounting policies and estimates in Managements
Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on
Form 10-K for the year ended December 31, 2004, except for the item discussed below. Future Accounting Requirements In
December 2004, the Financial Accounting Standards Board, FASB, issued revised Statement
123, or SFAS No. 123(R), Share-Based Payment, which requires companies to expense the estimated
fair value of employee stock options and similar awards. In April 2005, the SEC announced that the
accounting provisions of SFAS No. 123(R) will be effective
for the first quarter of 2006. We are in the process of determining how the new method of valuing stock-based compensation as
prescribed in SFAS No. 123(R) will be applied to valuing stock-based awards granted after the
effective date and the impact that the recognition of compensation expense related to such awards
will have on our financial statements. Results of Operations The following table sets forth operating data as a percentage of total revenues: Three MonthsEnded March 31,2005
    
    
    2004Total revenues
    
    
    100
    %
    
    
    100
    %Product sales
    
    
    87
    %
    
    
    72
    %Collaborative research revenue
    
    
    9
    %
    
    
    9
    %Royalty and license revenue
    
    
    4
    %
    
    
    19
    %Operating expenses:Cost of product sales
    
    
    23
    %
    
    
    18
    %Research and development
    
    
    27
    %
    
    
    24
    %Marketing and sales
    
    
    11
    %
    
    
    9
    %General and administrative
    
    
    10
    %
    
    
    10
    %Total operating expenses
    
    
    71
    %
    
    
    61
    %Income from operations
    
    
    29
    %
    
    
    39
    %Total other income, net
    
    
    2
    %
    
    
    1
    %Income before income taxes
    
    
    31
    %
    
    
    40
    %Income tax expense
    
    
    11
    %
    
    
    14
    %Net income
    
    
    20
    %
    
    
    26
    %
 16




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Three Months EndedMarch 31,
    
    
    Change2005
    
    
    2004
    
    
    Amount
    
    
    %(In millions, except per share data)Statement of income:Revenues:Product sales
    
    $
    59.6
    
    
    $
    55.0
    
    
    $
    4.6
    
    
    
    8
    %Collaborative research revenue
    
    
    6.3
    
    
    
    6.8
    
    
    
    (0.5
    )
    
    
    (7
    %)Royalty and license revenue
    
    
    2.9
    
    
    
    14.7
    
    
    
    (11.8
    )
    
    
    (80
    %)Total revenues
    
    
    68.8
    
    
    
    76.5
    
    
    
    (7.7
    )
    
    
    (10
    %)Operating expenses:Cost of product sales
    
    
    15.5
    
    
    
    13.9
    
    
    
    1.6
    
    
    
    12
    %Research and development
    
    
    18.7
    
    
    
    18.4
    
    
    
    0.3
    
    
    
    2
    %Marketing and sales
    
    
    7.4
    
    
    
    6.8
    
    
    
    0.6
    
    
    
    9
    %General and administrative
    
    
    7.2
    
    
    
    7.3
    
    
    
    (0.1
    )
    
    
    (1
    %)Total operating expenses
    
    
    48.8
    
    
    
    46.4
    
    
    
    2.4
    
    
    
    5
    %Income from operations
    
    
    20.0
    
    
    
    30.1
    
    
    
    (10.1
    )
    
    
    (34
    %)Net income
    
    $
    13.4
    
    
    $
    19.7
    
    
    $
    (6.3
    )
    
    
    (32
    %)Net income per shareBasic
    
    $
    0.27
    
    
    $
    0.40
    
    
    $
    (0.13
    )
    
    
    (33
    %)Diluted
    
    $
    0.26
    
    
    $
    0.39
    
    
    $
    (0.13
    )
    
    
    (33
    %)Weighted average shares outstandingBasic
    
    
    50.3
    
    
    
    48.9Diluted
    
    
    52.4
    
    
    
    51.0
   Amounts and percentages in this table and throughout our discussion and analysis of financial
conditions and results of operations may reflect rounding adjustments. Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
(Percentages have been rounded to the nearest whole percentage) Product sales The $4.6 million, or 8%, increase in product sales was principally the result of a $5.0
million increase in sales of our APTIMA Combo 2 assay along with a $2.2 million increase in
worldwide commercial sales of our blood screening products, both in the United States and
international markets, partially offset by a $2.4 million decrease in PACE product sales. Blood
screening product sales of $25.4 million, increased by 9% and represented 43% of product sales, for
the three months ended March 31, 2005, compared to $23.2 million, or 42% of product sales, for the
three months ended March 31, 2004. The increase in blood
screening sales in 2005 was due principally to increased international sales
in 2005
of our Procleix Ultrio assay, partially offset by a decrease in
January 2004 in our share of net revenues from Chiron (from 47.5% to 45.75%). 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 by others of competing products into
both the STD and blood screening markets and continuing pricing pressure as it relates to the STD
market. 17




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Collaborative research revenue The $0.5 million, or 7%, decrease in collaborative research revenue was primarily the result
of a $1.6 million decrease due to completion of NIH funding of our WNV assay development work
during 2004, partially offset by a $0.7 million increase in revenue for reimbursement from Chiron
for WNV development costs. 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 relationships may not be
established or maintained and current collaborative research revenue
may decline. In the event of FDA
approval of our Ultrio assay, we would expect Chiron to implement commercial pricing related to the
use of this product which would result in an increase in product sales partially offset by a
decrease in collaborative research revenue. Royalty and license revenue The $11.8 million, or 80%, decrease in royalty and license revenue 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, effective in the first quarter of 2004. These
decreases were partially offset by $1.9 million in license fee revenue recognized from bioMérieux
in January 2005, which was based on the total number of targets that may be selected pursuant to the
terms of the September 2004 agreement between Gen-Probe and
bioMerieux. 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 revenue 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 The $1.6 million, or 12%, increase in cost of sales was principally attributed to the volume
increase in product sales 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 74% in the three months ended March 31,
2005 from 75% in the same period of the prior year. The gross profit margin decrease was primarily
attributed to the amortization of capitalized software development costs of $0.6 million, which
began in the second quarter of 2004, and the increase in sales of TIGRIS instruments, which have a
lower margin. We anticipate that requirements for smaller pool sizes or ultimately
individual donor testing of blood samples,
if and when implemented, could result in lower gross margin rates, as additional tests would be
required to deliver the sample results, unless corresponding increase in sales pricing structure
is implemented. We are not able to accurately predict the timing and 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 were 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. The $0.3 million, or 2%, increase in R&D spending was due to a $2.6
million increase in expenses resulting from higher staffing levels to support 18




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product development projects, partially offset by a $1.0 million decrease in development lot production and lower per
unit costs, along with a $1.2 million decrease in expenses related to clinical trials for blood
screening products. Marketing and sales Our marketing and sales expenses include personnel costs, promotional expenses, and outside
services. The $0.6 million, or 9%, increase in spending principally included a $0.7 million
increase in salaries, benefits, commissions and other personnel related costs in our marketing,
sales, and technical service organization to support APTIMA Combo 2 market expansion and TIGRIS
instrument commercialization, partially offset by a $0.2 million decrease in professional fees due
to non-recurring consultant fees. 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. The $0.1 million, or 1%, decrease in spending
was the result of a $0.8 million decrease in professional fees as the costs associated with the
Bayer arbitration have decreased, partially offset by an increase in salaries, benefits and other
expenses resulting from higher staffing levels. 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 $0.4 million net increase in other
income was primarily due to an increase in interest income
resulting from an increase in the average
balance of our short-term investments. Income tax expense Income tax expense decreased to $7.7 million, or 36.2% of pretax income, in the three months
ended March 31, 2005, from $11.1 million, or 35.9% of pretax income, in the same period of the
prior year. The slight increase in our effective tax rate in 2005 was principally attributed to an
increase in the amount of pre-tax income taxed at the highest marginal tax rate. Further, the level
of 2005 R&D tax credits is expected to be proportionately lower than the increase in pre-tax
income. Liquidity and capital resources
(In thousands) March 31,
    
    
    December 31,2005
    
    
    2004Cash, cash equivalents and short-term investments
    
    $
    212,830
    
    
    $
    193,826Working capital
    
    
    251,895
    
    
    
    234,202
 Three Months EndedMarch 31,2005
    
    
    2004Cash provided by (used in):Operating activities
    
    $
    24,815
    
    
    $
    20,872Investing activities
    
    
    (24,772
    )
    
    
    (16,460
    )Financing activities
    
    
    6,705
    
    
    
    5,358Purchases of property, plant and equipment
(included in investing activities above)
    
    
    (10,228
    )
    
    
    (4,509
    )
 19




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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 March 31, 2005, we had $212.8 million of cash and cash equivalents and short-term investments. The $3.9 million increase in net cash provided by operating activities during the three months
ended March 31, 2005 was primarily the result of a $6.0 million increase in accounts payable and a
$4.7 million increase in stock option income tax benefits, partially offset by a $5.4 million
increase in prepaid expenses. The increase in prepaid expenses during the three months ended March
31, 2005 was due to the timing of payments to one of our vendors for the manufacture of TIGRIS
instruments. The $8.3 million increase in our investing activities during the three months ended March 31,
2005 included a $5.7 million increase in our capital expenditures (primarily related to the
construction of our new building) and a $1.6 million payment to Corixa for a license fee. 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. The $1.3 million increase in net cash provided by financing activities during the three months
ended March 31, 2005 was attributed to a $2.8 million increase in proceeds from the exercise of
stock options, partially offset by a $1.5 million decrease in employee purchases of our common
stock made through our Employee Stock Purchase Plan, or ESPP. During 2004, for administrative
reasons, we changed the purchase dates of our offering periods to occur at the end of June and
December. As a result, no purchases occurred during the current quarter. 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 2006, 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. At March 31, 2005, we were in compliance with all covenants. In July 2004, we commenced construction of an additional building to expand our main San Diego
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 $12.8 million was capitalized to
construction in-progress as of March 31, 2005. These costs are being capitalized as incurred and
depreciation will commence upon our completion and use, which is planned for early 2006. 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
our ERP system. Further, we expect to incur approximately $5.0 million to purchase TIGRIS diagnostic
instruments from our supplier that will be added to our installed base during 2005. Contractual obligations and commercial commitments Our significant 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 46 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. 20




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
    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 for prostate and other cancers, we may pay AdnaGen up to $3.0
million based on achievement of certain milestones. Our purchase 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 agreed to pay $10.0 million upon achievement of certain commercial events.
Further, we have agreed to pay Roche transfer fees for the HPV products. Additionally, the Company is obligated to purchase raw materials used in manufacturing and
instrumentation from two key vendors during 2005. The minimum purchase commitment is approximately
$6.2 million as of March 31, 2005. Our supply commitments include:  
    Chiron.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 determined on a rolling 12-month forecast. Our primary short-term needs for capital, which are subject to change, are for expansion of
our San Diego 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 may be funded under collaboration
agreements with partners. 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 additional equity or 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. 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. 21




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Summary of Option Activity
(Shares in thousands) Shares
    
    
    Options OutstandingRemaining
    
    
    Number of
    
    
    WeightedAvailable
    
    
    Shares to be
    
    
    Averagefor Future
    
    
    Issued Upon
    
    
    ExerciseIssuance
    
    
    Exercise
    
    
    PriceDecember 31, 2003
    
    
    3,624
    
    
    
    5,473
    
    
    $
    18.10Grants
    
    
    (2,061
    )
    
    
    2,061
    
    
    
    37.21Exercises
    
    
    
    
    
    
    (1,178
    )
    
    
    14.15Cancellations
    
    
    352
    
    
    
    (352
    )
    
    
    24.97December 31, 2004
    
    
    1,915
    
    
    
    6,004
    
    
    $
    25.03Grants
    
    
    (143
    )
    
    
    143
    
    
    
    48.85Exercises
    
    
    
    
    
    
    (406
    )
    
    
    16.52Cancellations
    
    
    90
    
    
    
    (90
    )
    
    
    32.79March 31, 2005
    
    
    1,862
    
    
    
    5,651
    
    
    $
    25.94
 In-the-Money and Out-of-the-Money Option Information
(Shares in thousands) Exercisable
    
    

Unexercisable
    
    
    TotalWtd. Avg.
    
    
    
    
    
    
    Wtd. Avg.
    
    
    
    
    
    
    Wtd. Avg.Exercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseAs of March 31, 2005
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceIn-the-Money
    
    
    2,131
    
    
    $
    17.72
    
    
    
    3,339
    
    
    $
    30.27
    
    
    
    5,470
    
    
    $
    25.38Out-of-the-Money(1)
    
    
    
    
    
    
    
    
    
    
    181
    
    
    
    48.53
    
    
    
    181
    
    
    
    48.53Total Options Outstanding
    
    
    2,131
    
    
    
    
    
    
    
    3,520
    
    
    
    
    
    
    
    5,651
   (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, $44.56, at the close of business
on March 31, 2005. Risk Factors The following information sets forth facts that could cause our actual results to differ materially
from those contained in forward-looking statements we have made in this Quarterly Report and those
we may make from time to time. 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 22




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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. In addition, the
trading market for our common stock will be influenced by the research and reports that industry or
securities analysts publish about our business and that of our competitors. 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 37% of our
total revenues for the three months ended March 31, 2005 and 35% of our total revenues for 2004.
Our agreement with Chiron will terminate in 2010 unless extended by the development of new products
under the agreement, in which case the agreement 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 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. Our agreement with Bayer for the distribution of our products will terminate in 2010. 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 sought 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 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, we received a tentative award in the
arbitration. The arbitrator determined that the were are entitled to a co-exclusive right to
distribute qualitative Transcription-Mediated Amplification, or TMA, assays to detect HCV 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 we requested.
As a result of terminating the agreement, we 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 us $2
million for our 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. 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. 23




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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 depends on their periodic renewal by us
and our collaborators. Our agreement with Chiron will terminate in
2010 unless extended by the development of new products under the agreement, in which case it 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. Subject to the final outcome of our
arbitration with Bayer, the remaining provisions of our Bayer collaboration agreement will
terminate in 2010. Both collaboration agreements are also subject to termination prior to
expiration upon a material breach by either party to the agreement. 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 24




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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, Inc. which received FDA approval of its Polymerase Chain Reaction, or PCR, based NAT tests for blood
screening in December 2002 and with whom we recently entered
into a supply and purchase agreement. 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 & 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 the three months ended March 31, 2005 and for the year ended December
31, 2004. 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 three months ended March 31, 2005. In addition,
Quest Diagnostics Incorporated, Laboratory Corporation of America Holdings and various state and
city public health agencies accounted for an aggregate of 22% of our total revenues for the three
months ended March 31, 2005 and 20% of our total revenues for 2004. 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. 25




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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 201 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 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. In
February 2005, we received a letter from the Institut Pasteur regarding alleged infringement of
Institut Pasteurs European Patent EP 0 178 978 (Cloned DNA sequences, hybridizable 26




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with genomic RNA of
lymphadenopathy-associated virus, or LAV, (978 patent) by the HIV-1 nucleic acid screening
assays performed on our Procleix system that is marketed and distributed by Chiron. There can be
no assurances as to the ultimate outcomes of these matters. 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 March 31, 2005, we had approximately $149.6 million of long-lived assets, including
$22.8 million of capitalized software relating to our TIGRIS instrument, goodwill of $18.6 million
and $24.9 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 $34.9 million of
land and building, $5.4 million of leasehold improvements, $14.6 million of construction
in-progress and $28.1 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. 27




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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
the only manufacturer of our TIGRIS instrument. MGM Instruments, Inc. is the only manufacturer of
our 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 28




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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 manufacturers 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. 29




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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, may result in the
suspension of sales of our products, 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 17% of our total revenues for
the three months ended March 31, 2005 and 15% of our total revenues for 2004. Sales by Chiron of
our blood screening products outside of the United States accounted for 69% of our international
revenues for the three months ended March 31, 2005 and 58% of our international revenues for 2004.
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 5% and 6%, respectively, of our
international sales for the three months ended March 31, 2005 and 10% and 6%, respectively, for
2004. 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 assay that meets particular Japanese requirements for screening 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. 30




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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. 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. 31




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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. Currently, our positions of Vice President, Marketing and Vice
President, Sales are vacant and we are now recruiting for these functions. 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. 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 32




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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. 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 infectious diseases, 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: 33




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
    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. 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. 34




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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. 123(R), Share-Based Payment, which is a revision
of SFAS No. 123, Accounting for Stock-Based
Compensation. In April
2005, the SEC approved a vote that will effectively require us to adopt this statement on January
1, 2006. 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 or director 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 and director stock
options under SFAS No. 123(R) would have reduced our net income by $3.6 million and $1.9 million for
the three months ended March 31, 2005 and 2004, respectively. 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 have recently implemented a new general ledger information system and data warehouse
to replace our various legacy systems. As a part of this effort, we are transitioning data and
changing processes that may be more expensive, time consuming and resource intensive than planned.
Any disruptions that may occur in the continued 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. Available Information Copies of our public filings are available on our Internet website at http://www.gen-probe.com
as soon as reasonably practicable after we electronically file such material with, or furnish them
to, the SEC. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk 35




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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
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. We are exposed to foreign exchange risk for expenditures in certain foreign countries, but the
total receivables and payables denominated in foreign currencies at March 31, 2005 were not
material. We believe that our business operations are not exposed to market risk relating to
commodity price risk. 
 Item 4. Controls and Procedures As of the end of the period covered by this Quarterly Report on Form 10-Q, 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 quarter ended March 31, 2005. 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 has included certain internal control areas in which we have
made and are continuing to make changes to improve and enhance controls. During the first quarter
of 2005, we implemented an Enterprise Resource Planning (ERP) system which is expected to improve
and enhance internal controls over financial reporting. This ongoing implementation has materially changed how transactions are being
processed and has also changed the structure and operation of some internal controls. While the
ERP changes materially affected our internal control over financial reporting during the current
quarter, the implementation has proceeded to date without material adverse effects on our internal
control over financial reporting. Except for the ERP implementation described above, there have been no other changes in our
internal control over financial reporting during the quarter ended March 31, 2005 that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting. We maintain disclosure controls and procedures and internal controls that are designed to
ensure that information required to be disclosed in our current and periodic 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 and
internal controls, 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. 
 PART II  OTHER INFORMATION 
 Item 1. Legal Proceedings A description of our material pending legal proceedings is disclosed in Note 11  Litigation
of the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this
report and is incorporated by reference herein. See Notes to Condensed Consolidated Financial
Statement  Note 11  Litigation. We are also engaged in other legal actions arising in the
ordinary course of our business and believe that the ultimate outcome of these actions will not have a material 36




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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. 37




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Item 6. Exhibits ExhibitNumber
    
    Description2.1(1)
    
    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(1)
    
    Form of Amended and Restated Certificate of Incorporation of Gen-Probe Incorporated.3.2(5)
    
    Certificate of Amendment of Amended and Restated Certificate of Incorporation of
Gen-Probe Incorporated.3.3(1)
    
    Form of Amended and Restated Bylaws of Gen-Probe Incorporated.3.4(5)
    
    Certificate of Designations of the Series A Junior Participating Preferred Stock of
Gen-Probe Incorporated.4.1(1)
    
    Specimen common stock certificate.4.2(2)
    
    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(3)
    
    First Amendment to Rights Agreement, dated October 9, 2002, between Gen-Probe
Incorporated and Mellon Investor Services LLC.4.4(4)
    
    Second Amendment to Rights Agreement, dated November 20, 2003.10.79
    
    Modified Blood Screening Instrument  eSAS 2 Addendum effective January 1, 2002 to
the Agreement dated as of June 11, 1998 between Gen-Probe Incorporated and Chiron
Corporation.*10.80
    
    Amendment No. 6 effective January 1, 2004 to Agreement dated as of June 11, 1998
between Gen-Probe Incorporation and Chiron Corporation.*10.81
    
    Supply and Purchase Agreement between Gen-Probe Incorporated, F. Hoffman-La Roche
Ltd. and Roche Molecular Systems, Inc. effective February 15, 2005.*10.82
    
    Amendment dated February 1, 2005 to Deferred Issuance Restricted Stock Conversion
Agreement, Deferred Issuance Award Agreement and Election Agreement between
Gen-Probe Incorporated and Henry L. Nordhoff, dated October 8, 2004.31.1
    
    Certification dated May 6, 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 May 6, 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 May 6, 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 May 6, 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 Amendment No. 2 to Registration Statement on Form 10
filed with the SEC on August 14, 2002.(2)
    
    Incorporated by reference to Gen-Probes Report on Form 8-K filed with the SEC on September
17, 2002.(3)
    
    Incorporated by reference to Gen-Probes Quarterly Report on Form 10-Q filed with the SEC
on November 14, 2002.(4)
    
    Incorporated by reference to Gen-Probes Report on Form 8-K filed with the SEC on November
21, 2003.(5)
    
    Incorporated by reference to Gen-Probes Quarterly Report on Form 10-Q filed with the SEC on
August 9, 2004.




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*
    
    Gen-Probe has requested confidential treatment with respect to certain portions of this
exhibit. The confidential portions of this exhibit are marked by an asterisk and have been
omitted and filed separately with the SEC pursuant to Gen-Probes request for confidential
treatment.




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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. DATE:
May 10, 2005
    
    By:
    
    /s/ Henry L. NordhoffHenry L. NordhoffChairman, President and Chief Executive
Officer (Principal Executive Officer)DATE:
May 10, 2005
    
    By:
    
    /s/ Herm RosenmanHerm RosenmanVice President  Finance and Chief
Financial Officer (Principal Financial
Officer and Principal Accounting Officer)