##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
   o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
  GEN-PROBE INCORPORATED
  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    33-0044608
(I.R.S. Employer
Identification Number)
 10210 Genetic Center Drive
San Diego, CA
(Address of Principal Executive
Offices)
    
    92121
(Zip Code)
 (858) 410-8000
 þ o
 þ o o
 o þ




---



##### 



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
    
    
    15Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    27PART IIItem 1. Legal Proceedings
    
    
    28Item 1A. Risk Factors
    
    
    28Item 4. Submission of Matters to a Vote of Securities Holders
    
    
    41Item 6. Exhibits
    
    
    42SIGNATURESEXHIBIT 10.93EXHIBIT 10.94EXHIBIT 10.95EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



GEN-PROBE INCORPORATED
 CONSOLIDATED BALANCE SHEETS
  June 30,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    29,125
    
    
    $
    32,328Short-term investments
    
    
    209,529
    
    
    
    187,960Trade accounts receivable, net of allowance for
doubtful accounts of $670 and $790 at June 30,
2006 and December 31, 2005, respectively
    
    
    28,674
    
    
    
    31,930Accounts receivable  other
    
    
    1,787
    
    
    
    1,924Inventories
    
    
    40,766
    
    
    
    36,342Deferred income taxes
    
    
    10,750
    
    
    
    10,389Prepaid expenses
    
    
    11,332
    
    
    
    10,768Other current assets
    
    
    4,347
    
    
    
    4,184Total current assets
    
    
    336,310
    
    
    
    315,825Property, plant and equipment, net
    
    
    128,908
    
    
    
    105,190Capitalized software
    
    
    19,695
    
    
    
    20,952Goodwill
    
    
    18,621
    
    
    
    18,621License, manufacturing access fees and other assets
    
    
    56,834
    
    
    
    49,648Total assets
    
    $
    560,368
    
    
    $
    510,236LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    13,606
    
    
    $
    14,029Accrued salaries and employee benefits
    
    
    13,654
    
    
    
    14,910Other accrued expenses
    
    
    3,745
    
    
    
    3,264Income tax payable
    
    
    6,697
    
    
    
    13,192Deferred revenue
    
    
    3,923
    
    
    
    7,771Total current liabilities
    
    
    41,625
    
    
    
    53,166Deferred income taxes
    
    
    5,124
    
    
    
    5,124Deferred revenue
    
    
    4,000
    
    
    
    4,333Deferred rent
    
    
    182
    
    
    
    240Commitments 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, 51,789,444 and
51,137,541 shares issued and outstanding at
June 30, 2006 and December 31, 2005,
respectively
    
    
    5
    
    
    
    5Additional paid-in capital
    
    
    309,301
    
    
    
    281,907Deferred compensation
    
    
    
    
    
    
    (5,951
    )Accumulated other comprehensive loss
    
    
    (674
    )
    
    
    (1,231
    )Retained earnings
    
    
    200,805
    
    
    
    172,643Total stockholders equity
    
    
    509,437
    
    
    
    447,373Total liabilities and stockholders equity
    
    $
    560,368
    
    
    $
    510,236
  3




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##### Table of Contents



GEN-PROBE INCORPORATED
 CONSOLIDATED STATEMENTS OF INCOME
 
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Product sales
    
    $
    77,813
    
    
    $
    65,131
    
    
    $
    156,341
    
    
    $
    124,710Collaborative research revenue
    
    
    6,388
    
    
    
    6,678
    
    
    
    13,273
    
    
    
    13,022Royalty and license revenue
    
    
    1,021
    
    
    
    1,085
    
    
    
    1,864
    
    
    
    3,990Total revenues
    
    
    85,222
    
    
    
    72,894
    
    
    
    171,478
    
    
    
    141,722Operating expenses:Cost of product sales
    
    
    24,802
    
    
    
    20,350
    
    
    
    50,914
    
    
    
    35,848Research and development
    
    
    20,329
    
    
    
    17,408
    
    
    
    39,655
    
    
    
    36,091Marketing and sales
    
    
    9,145
    
    
    
    7,384
    
    
    
    18,007
    
    
    
    14,810General and administrative
    
    
    10,698
    
    
    
    7,780
    
    
    
    21,356
    
    
    
    14,971Total operating expenses
    
    
    64,974
    
    
    
    52,922
    
    
    
    129,932
    
    
    
    101,720Income from operations
    
    
    20,248
    
    
    
    19,972
    
    
    
    41,546
    
    
    
    40,002Total other income, net
    
    
    1,403
    
    
    
    1,001
    
    
    
    3,160
    
    
    
    2,082Income before income taxes
    
    
    21,651
    
    
    
    20,973
    
    
    
    44,706
    
    
    
    42,084Income tax expense
    
    
    8,021
    
    
    
    7,517
    
    
    
    16,544
    
    
    
    15,167Net income
    
    $
    13,630
    
    
    $
    13,456
    
    
    $
    28,162
    
    
    $
    26,917Net income per share:Basic
    
    $
    0.26
    
    
    $
    0.27
    
    
    $
    0.55
    
    
    $
    0.53Diluted
    
    $
    0.26
    
    
    $
    0.26
    
    
    $
    0.53
    
    
    $
    0.51Weighted average shares outstanding:Basic
    
    
    51,563
    
    
    
    50,550
    
    
    
    51,403
    
    
    
    50,414Diluted
    
    
    53,186
    
    
    
    52,315
    
    
    
    53,023
    
    
    
    52,339
   4




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##### Table of Contents



GEN-PROBE INCORPORATED
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 Six Months EndedJune 30,2006
    
    
    2005Operating activitiesNet income
    
    $
    28,162
    
    
    $
    26,917Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    12,507
    
    
    
    11,038Stock-based compensation charges  restricted stock
    
    
    958
    
    
    
    266Stock-based compensation charges  all other
    
    
    9,775
    
    
    
    Stock option income tax benefits
    
    
    
    
    
    
    6,451Excess tax benefit from employee stock options
    
    
    (6,918
    )
    
    
    (Gain)/loss on disposal of property and equipment
    
    
    (23
    )
    
    
    59Changes in assets and liabilities:Accounts receivable
    
    
    3,538
    
    
    
    (5,760
    )Inventories
    
    
    (3,541
    )
    
    
    (4,549
    )Prepaid expenses
    
    
    (564
    )
    
    
    (3,498
    )Other assets
    
    
    (217
    )
    
    
    (213
    )Accounts payable
    
    
    (441
    )
    
    
    6,574Accrued salaries and employee benefits
    
    
    (1,256
    )
    
    
    (1,171
    )Other accrued expenses
    
    
    423
    
    
    
    (72
    )Income tax payable
    
    
    417
    
    
    
    4,093Deferred revenue
    
    
    (4,181
    )
    
    
    2,681Deferred income taxes
    
    
    (374
    )
    
    
    (275
    )Deferred rent
    
    
    (58
    )
    
    
    (29
    )Net cash provided by operating activities
    
    
    38,207
    
    
    
    42,512Investing activitiesProceeds from sales and maturities of short-term investments
    
    
    40,528
    
    
    
    51,532Purchases of short-term investments
    
    
    (62,225
    )
    
    
    (53,647
    )Cash paid for acquisition of minority interest in Molecular Light Technology Limited
    
    
    
    
    
    
    (1,539
    )Purchases of property, plant and equipment
    
    
    (32,836
    )
    
    
    (20,162
    )Capitalization of intangible assets, including license and manufacturing access fees
    
    
    (2,074
    )
    
    
    (21,822
    )Cash paid for investment in Qualigen
    
    
    (6,993
    )
    
    
    Other assets
    
    
    42
    
    
    
    (583
    )Net cash used in investing activities
    
    
    (63,558
    )
    
    
    (46,221
    )Financing activitiesExcess tax benefit from employee stock options
    
    
    6,918
    
    
    
    Proceeds from issuance of common stock
    
    
    14,822
    
    
    
    10,956Net cash provided by financing activities
    
    
    21,740
    
    
    
    10,956Effect of exchange rate changes on cash and cash equivalents
    
    
    408
    
    
    
    (243
    )Net (decrease) increase in cash and cash equivalents
    
    
    (3,203
    )
    
    
    7,004Cash and cash equivalents at the beginning of period
    
    
    32,328
    
    
    
    25,498Cash and cash equivalents at the end of period
    
    $
    29,125
    
    
    $
    32,502
  5




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##### Table of Contents



Notes to the Consolidated Financial Statements (unaudited)
      Recent accounting pronouncements
    Contingencies
  6




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##### Table of Contents



Principles of consolidation
   Use of estimates
  Foreign currencies
   Valuation and amortization method
  Weighted Average
    
    
    ActualRemaining
    
    
    UnamortizedExpense
    
    
    Expense as ofAwards
    
    Life (Years)
    
    
    June 30, 2006Options
    
    
    1.6
    
    
    $
    26,742ESPP
    
    
    0.2
    
    
    
    72Restricted stock
    
    
    1.7
    
    
    
    3,859Deferred issuance restricted stock
    
    
    1.6
    
    
    
    2,223$
    32,896
 SFAS No. 123(R),
 7




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##### Table of Contents



Expected term
  Expected volatility
  Risk-free interest rate
  Dividends
  Forfeitures
  Assumptions
  8




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##### Table of Contents



Stock Option Plans
    
    
    ESPPThree Months
    
    
    Six Months
    
    
    Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,
    
    
    Ended June 30,
    
    
    Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Risk-free interest rate
    
    
    4.8
    %
    
    
    3.8
    %
    
    
    4.7
    %
    
    
    3.7
    %
    
    
    4.0
    %
    
    
    2.6
    %
    
    
    4.0
    %
    
    
    2.6
    %Volatility
    
    
    43
    %
    
    
    54
    %
    
    
    43
    %
    
    
    56
    %
    
    
    41
    %
    
    
    59
    %
    
    
    41
    %
    
    
    59
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expected term (years)
    
    
    5.4
    
    
    
    5.2
    
    
    
    5.4
    
    
    
    4.8
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5Resulting average fair value
    
    $
    24.59
    
    
    $
    22.44
    
    
    $
    24.21
    
    
    $
    22.85
    
    
    $
    12.52
    
    
    $
    13.24
    
    
    $
    12.52
    
    
    $
    13.24
 Pro forma information for period prior to adoption of SFAS No. 123(R)
  Three Months Ended
    
    
    Six Months EndedJune 30, 2005
    
    
    June 30, 2005Net income:As reported
    
    $
    13,456
    
    
    $
    26,917Stock-based
employee
compensation
expense included
in reported net
income, net of
related tax
effects
    
    
    65
    
    
    
    119Total stock-based
employee
compensation
expense
determined under
fair value based
method for all
options, net of
related tax
effects
    
    
    (3,824
    )
    
    
    (7,751
    )Pro forma net income
    
    $
    9,697
    
    
    $
    19,285Net income per share:As reportedBasic
    
    $
    0.27
    
    
    $
    0.53Diluted
    
    $
    0.26
    
    
    $
    0.51Pro formaBasic
    
    $
    0.19
    
    
    $
    0.38Diluted
    
    $
    0.19
    
    
    $
    0.37
 Impact of the adoption of SFAS No. 123(R)
  Three Months Ended
    
    
    Six Months EndedJune 30, 2006
    
    
    June 30, 2006Cost of product sales
    
    $
    490
    
    
    $
    623Research and development
    
    
    1,785
    
    
    
    3,674Marketing and sales
    
    
    679
    
    
    
    1,472General and administrative
    
    
    2,154
    
    
    
    4,006Reduction of operating income before income taxes
    
    
    5,108
    
    
    
    9,775Income tax benefit
    
    
    (1,800
    )
    
    
    (3,451
    )Reduction of net income
    
    $
    3,308
    
    
    $
    6,324Reduction of net income per share:Basic
    
    $
    0.06
    
    
    $
    0.12Diluted
    
    $
    0.06
    
    
    $
    0.12
  9




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##### Table of Contents



Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMunicipal securities
    
    $
    206,706
    
    
    $
    43
    
    
    $
    (2,394
    )
    
    $
    204,355Foreign debt securities
    
    
    5,174
    
    
    
    
    
    
    
    
    
    
    
    5,174Total short-term investments
    
    $
    211,880
    
    
    $
    43
    
    
    $
    (2,394
    )
    
    $
    209,529
 continuous unrealized loss position
 Less than 12 Months
    
    
    More than 12 MonthsEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesMunicipal securities
    
    $
    104,998
    
    
    $
    (1,341
    )
    
    $
    89,314
    
    
    $
    (1,053
    )Foreign debt securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total short-term investments
    
    $
    104,998
    
    
    $
    (1,341
    )
    
    $
    89,314
    
    
    $
    (1,053
    )
    Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    13,630
    
    
    $
    13,456
    
    
    $
    28,162
    
    
    $
    26,917Weighted average shares outstanding  Basic
    
    
    51,563
    
    
    
    50,550
    
    
    
    51,403
    
    
    
    50,414Effect of dilutive common stock options outstanding
    
    
    1,623
    
    
    
    1,765
    
    
    
    1,620
    
    
    
    1,925Weighted average shares outstanding  Diluted
    
    
    53,186
    
    
    
    52,315
    
    
    
    53,023
    
    
    
    52,339Net income per share:Basic
    
    $
    0.26
    
    
    $
    0.27
    
    
    $
    0.55
    
    
    $
    0.53Diluted
    
    $
    0.26
    
    
    $
    0.26
    
    
    $
    0.53
    
    
    $
    0.51
  10




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    13,630
    
    
    $
    13,456
    
    
    $
    28,162
    
    
    $
    26,917Foreign currency
translation
adjustment
    
    
    908
    
    
    
    (508
    )
    
    
    1,118
    
    
    
    (318
    )Change in
unrealized gain
(loss) on
investments
    
    
    (212
    )
    
    
    337
    
    
    
    (561
    )
    
    
    (488
    )Comprehensive income
    
    $
    14,326
    
    
    $
    13,285
    
    
    $
    28,719
    
    
    $
    26,111
   Inventories
 June 30,
    
    
    December 31,2006
    
    
    2005Raw materials and supplies
    
    $
    5,697
    
    
    $
    5,430Work in process
    
    
    19,505
    
    
    
    17,934Finished goods
    
    
    15,564
    
    
    
    12,978$
    40,766
    
    
    $
    36,342
 Property, plant and equipment
 June 30,
    
    
    December 31,2006
    
    
    2005Land
    
    $
    13,860
    
    
    $
    9,100Buildings
    
    
    71,069
    
    
    
    39,535Machinery and equipment
    
    
    117,905
    
    
    
    106,433Tenant improvements
    
    
    23,765
    
    
    
    16,301Furniture and fixtures
    
    
    15,113
    
    
    
    10,346Construction in-progress
    
    
    4,034
    
    
    
    32,143Property, plant and equipment (at cost)
    
    
    245,746
    
    
    
    213,858Less accumulated depreciation and amortization
    
    
    (116,838
    )
    
    
    (108,668
    )Property, plant and equipment (net)
    
    $
    128,908
    
    
    $
    105,190
 11




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##### Table of Contents



License, manufacturing access fees and other assets
 June 30, 2006
    
    
    December 31, 2005Accumulated
    
    
    
    
    
    
    
    
    
    
    AccumulatedGross
    
    
    Amortization
    
    
    Net
    
    
    Gross
    
    
    Amortization
    
    
    NetIntangible assets subject to amortization:Capitalized software
    
    $
    25,142
    
    
    $
    5,447
    
    
    $
    19,695
    
    
    $
    25,142
    
    
    $
    4,190
    
    
    $
    20,952Patents
    
    
    16,296
    
    
    
    15,045
    
    
    
    1,251
    
    
    
    15,822
    
    
    
    14,817
    
    
    
    1,005Purchased intangible assets
    
    
    33,636
    
    
    
    32,498
    
    
    
    1,138
    
    
    
    33,636
    
    
    
    32,330
    
    
    
    1,306License and manufacturing access fees
    
    
    50,007
    
    
    
    5,055
    
    
    
    44,952
    
    
    
    48,354
    
    
    
    3,517
    
    
    
    44,837Total
    
    $
    125,081
    
    
    $
    58,045
    
    
    $
    67,036
    
    
    $
    122,954
    
    
    $
    54,854
    
    
    $
    68,100Goodwill
    
    $
    26,298
    
    
    $
    7,677
    
    
    $
    18,621
    
    
    $
    26,298
    
    
    $
    7,677
    
    
    $
    18,621Investment in Molecular Profiling Institute, Inc.
    
    $
    2,500
    
    
    $
    
    
    
    $
    2,500
    
    
    $
    2,500
    
    
    $
    
    
    
    $
    2,500Investment in Qualigen, Inc.
    
    $
    6,993
    
    
    $
    
    
    
    $
    6,993
    
    
    $
    
    
    
    $
    
    
    
    $
    
  ®
       12




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##### Table of Contents



WeightedAverage
    
    
    AggregateRemaining
    
    
    IntrinsicNumber of
    
    
    Weighted Average
    
    
    Contractual
    
    
    ValueShares
    
    
    Exercise Price
    
    
    Life (Years)
    
    
    (in thousands)Outstanding at December 31, 2005
    
    
    5,953,586
    
    
    $
    29.53Granted
    
    
    347,050
    
    
    
    52.29Exercised
    
    
    (609,351
    )
    
    
    21.51Cancelled
    
    
    (90,885
    )
    
    
    38.08Outstanding at June 30, 2006
    
    
    5,600,400
    
    
    $
    31.67
    
    
    
    7.4
    
    
    $
    126,221Exercisable at June 30, 2006
    
    
    2,961,286
    
    
    $
    24.14
    
    
    
    6.5
    
    
    $
    89,052
   WeightedWeighted
    
    
    AverageAverage
    
    
    RemainingNumber of
    
    
    Grant-Date
    
    
    ContractualShares
    
    
    Fair Value
    
    
    Life (Years)Non-vested at December 31, 2005
    
    
    3,013,536
    
    
    $
    17.09Granted
    
    
    347,050
    
    
    
    24.21Vested
    
    
    (630,831
    )
    
    
    13.46Forfeited
    
    
    (90,641
    )
    
    
    18.34Non-vested at June 30, 2006
    
    
    2,639,114
    
    
    $
    19.00
    
    
    
    8.5
  13




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##### Table of Contents



Balance at December 31, 2005
    
    $
    447,373Net income
    
    
    28,162Other comprehensive income, net
    
    
    557Net proceeds from the issuance of common stock
    
    
    13,102Purchase of common shares through ESPP
    
    
    1,720Purchase of common stock by board members
    
    
    71Stock-based compensation expense  restricted stock
    
    
    887Stock-based compensation expense  all other
    
    
    9,775Stock-based compensation  net capitalized to inventory
    
    
    872Tax benefit from the exercise of stock options
    
    
    6,918Balance at June 30, 2006
    
    $
    509,437
        14




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Overview
   Recent Events
 Financial results
   15




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##### Table of Contents



Licensing
 in vivo in vitro
   Product development
    Chlamydia trachomatis
  16




---



##### Table of Contents



Revenues
  Product sales
   Collaborative research revenue
  17




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##### Table of Contents



Royalty and license revenue
   Cost of product sales
     Research and development
  18




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##### Table of Contents



Critical Accounting Policies and Estimates
   Stock-based compensation expense
  19




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##### Table of Contents



Results of Operations
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    $ Change
    
    
    % Change
    
    
    2006
    
    
    2005
    
    
    $ Change
    
    
    % Change(in millions, except per share data)Statements of income:Revenues:Product sales
    
    $
    77.8
    
    
    $
    65.1
    
    
    $
    12.7
    
    
    
    20
    %
    
    $
    156.3
    
    
    $
    124.7
    
    
    $
    31.6
    
    
    
    25
    %Collaborative research revenue
    
    
    6.4
    
    
    
    6.7
    
    
    
    (0.3
    )
    
    
    (4
    )%
    
    
    13.3
    
    
    
    13.0
    
    
    
    0.3
    
    
    
    2
    %Royalty and license revenue
    
    
    1.0
    
    
    
    1.1
    
    
    
    (0.1
    )
    
    
    (9
    )%
    
    
    1.9
    
    
    
    4.0
    
    
    
    (2.1
    )
    
    
    (53
    )%Total revenues
    
    
    85.2
    
    
    
    72.9
    
    
    
    12.3
    
    
    
    17
    %
    
    
    171.5
    
    
    
    141.7
    
    
    
    29.8
    
    
    
    21
    %Operating expenses:Cost of product sales
    
    
    24.8
    
    
    
    20.3
    
    
    
    4.5
    
    
    
    22
    %
    
    
    50.9
    
    
    
    35.8
    
    
    
    15.1
    
    
    
    42
    %Research and development
    
    
    20.3
    
    
    
    17.4
    
    
    
    2.9
    
    
    
    17
    %
    
    
    39.7
    
    
    
    36.1
    
    
    
    3.6
    
    
    
    10
    %Marketing and sales
    
    
    9.2
    
    
    
    7.4
    
    
    
    1.8
    
    
    
    24
    %
    
    
    18.0
    
    
    
    14.8
    
    
    
    3.2
    
    
    
    22
    %General and administrative
    
    
    10.7
    
    
    
    7.8
    
    
    
    2.9
    
    
    
    37
    %
    
    
    21.4
    
    
    
    15.0
    
    
    
    6.4
    
    
    
    43
    %Total operating expenses
    
    
    65.0
    
    
    
    52.9
    
    
    
    12.1
    
    
    
    23
    %
    
    
    130.0
    
    
    
    101.7
    
    
    
    28.3
    
    
    
    28
    %Income from operations
    
    
    20.2
    
    
    
    20.0
    
    
    
    0.2
    
    
    
    1
    %
    
    
    41.5
    
    
    
    40.0
    
    
    
    1.5
    
    
    
    4
    %Total other income, net
    
    
    1.4
    
    
    
    1.0
    
    
    
    0.4
    
    
    
    40
    %
    
    
    3.2
    
    
    
    2.1
    
    
    
    1.1
    
    
    
    52
    %Income tax expense
    
    
    8.0
    
    
    
    7.5
    
    
    
    0.5
    
    
    
    7
    %
    
    
    16.5
    
    
    
    15.2
    
    
    
    1.3
    
    
    
    9
    %Net income
    
    $
    13.6
    
    
    $
    13.5
    
    
    $
    0.1
    
    
    
    1
    %
    
    $
    28.2
    
    
    $
    26.9
    
    
    $
    1.3
    
    
    
    5
    %Net income per shareBasic
    
    $
    0.26
    
    
    $
    0.27
    
    
    $
    (.01
    )
    
    
    (4
    )%
    
    $
    0.55
    
    
    $
    0.53
    
    
    $
    0.02
    
    
    
    4
    %Diluted
    
    $
    0.26
    
    
    $
    0.26
    
    
    $
    
    
    
    
    0
    %
    
    $
    0.53
    
    
    $
    0.51
    
    
    $
    0.02
    
    
    
    4
    %Weighted average shares outstandingBasic
    
    
    51.6
    
    
    
    50.6
    
    
    
    
    
    
    
    
    
    
    
    51.4
    
    
    
    50.4Diluted
    
    
    53.2
    
    
    
    52.3
    
    
    
    
    
    
    
    
    
    
    
    53.0
    
    
    
    52.3
 
 Amounts and percentages in this table and throughout our discussion and analysis of financial
conditions and results of operations may reflect rounding adjustments. Percentages have been
rounded to the nearest whole percentage. 20




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##### Table of Contents



Product sales
    Collaborative research revenue
    Royalty and license revenue
   21




---



##### Table of Contents



Cost of product sales
      Research and development
   22




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##### Table of Contents



Marketing and sales
   General and administrative
   Total other income, net
  Income tax expense
  Liquidity and Capital Resources
 June 30,
    
    
    December 31,2006
    
    
    2005Cash, cash equivalents and short-term investments
    
    $
    238,654
    
    
    $
    220,288Working capital
    
    $
    294,685
    
    
    $
    262,659Current ratio
    
    
    8:1
    
    
    
    6:1
 23




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##### Table of Contents



Six Months EndedJune 30,2006
    
    
    2005
    
    
    $ ChangeCash provided by (used in):Operating activities
    
    $
    38,207
    
    
    $
    42,512
    
    
    $
    (4,305
    )Investing activities
    
    
    (63,558
    )
    
    
    (46,221
    )
    
    
    (17,337
    )Financing activities
    
    
    21,740
    
    
    
    10,956
    
    
    
    10,784Purchases of property, plant and equipment (included in investing activities above)
    
    $
    (32,836
    )
    
    $
    (20,162
    )
    
    $
    (12,674
    )
        24




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##### Table of Contents



Contractual Obligations and Commercial Commitments
  Total
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterOperating leases (1)
    
    $
    1,826
    
    
    $
    726
    
    
    $
    863
    
    
    $
    167
    
    
    $
    70
    
    
    $
    Material purchase commitments(2)
    
    
    19,195
    
    
    
    12,320
    
    
    
    6,875
    
    
    
    
    
    
    
    
    
    
    
    Collaborative commitments(3)
    
    
    18,369
    
    
    
    3,769
    
    
    
    3,050
    
    
    
    10,400
    
    
    
    1,150
    
    
    
    Total (4)
    
    $
    39,390
    
    
    $
    16,815
    
    
    $
    10,788
    
    
    $
    10,567
    
    
    $
    1,220
    
    
    $
    
 
 (1)
    
    Reflects obligations on facilities under operating leases in place as of June 30,
2006. Future minimum lease payments are included in the table above.(2)
    
    Amounts represent our minimum purchase commitments from two key vendors for TIGRIS
instruments and raw materials used in manufacturing. Of the $15.6 million expected to be
purchased for TIGRIS instruments in 2006 and 2007, we anticipate that approximately $5.5
million will be reimbursed by Novartis.(3)
    
    In addition to the minimum payments due under our collaborative agreements, we may
be required to pay up to $8.5 million in milestone payments, plus royalties on net sales of
any products using specified technology.(4)
    
    Does not include amounts relating to our obligations under our collaboration with
Novartis, pursuant to which both parties have obligations to each other. We are obligated to
manufacture and supply our blood screening assay to Novartis, and Novartis 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 Novartis intends to take delivery, and certain quantities specified on
a rolling 12-month forecast.      Stock Options
 Option program description
  25




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##### Table of Contents



General option and equity compensation plan information
 Summary of Option and Restricted Stock Activity
 Shares
    
    
    Options OutstandingRemaining
    
    
    Number of
    
    
    WeightedAvailable
    
    
    Shares to be
    
    
    Average
    
    
    Restricted
    
    
    Directorfor Future
    
    
    Issued Upon
    
    
    Exercise
    
    
    Stock
    
    
    StockIssuance
    
    
    Exercise
    
    
    Price
    
    
    Awards
    
    
    PurchasesDecember 31, 2004
    
    
    1,915
    
    
    
    6,004
    
    
    $
    25.03
    
    
    
    40
    
    
    
    Grants
    
    
    (1,363
    )
    
    
    1,228
    
    
    
    43.82
    
    
    
    132
    
    
    
    3Exercises
    
    
    
    
    
    
    (890
    )
    
    
    17.65
    
    
    
    
    
    
    
    (3
    )Cancellations
    
    
    388
    
    
    
    (388
    )
    
    
    32.78
    
    
    
    
    
    
    
    December 31, 2005
    
    
    940
    
    
    
    5,954
    
    
    $
    29.53
    
    
    
    172
    
    
    
    Authorized
    
    
    3,000
    *
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Grants
    
    
    (388
    )
    
    
    347
    
    
    
    52.29
    
    
    
    20
    **
    
    
    1Exercises
    
    
    
    
    
    
    (609
    )
    
    
    21.51
    
    
    
    
    
    
    
    (1
    )Cancellations
    
    
    91
    
    
    
    (91
    )
    
    
    38.08
    
    
    
    
    
    
    
    June 30, 2006
    
    
    3,643
    
    
    
    5,601
    
    
    $
    31.67
    
    
    
    192
    ***
    
    
    
 
 *
    
    In May 2006, the Companys stockholders approved an amendment to the 2003 Incentive Award
Plan (the 2003 Plan) that increased the aggregate number of shares of common stock
authorized for issuance by 3,000,000 shares.**
    
    Actual number of restricted shares granted was 20,000, however, pursuant to the terms of the
2003 Plan, as amended, the number of shares reserved for issuance has been reduced by 40,000,
reflecting two shares for each share of restricted stock granted after May 17, 2006 (in lieu
of one share under the 2003 Plan prior to its amendment).***
    
    Includes 80,000 shares of Deferred Issuance Restricted Stock and approximately 112,000 shares
of Restricted Stock as of June 30, 2006. In-the-Money and Out-of-the-Money Option Information
 Exercisable
    
    
    Unexercisable
    
    
    TotalWeighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseAs of June 30, 2006
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceIn-the-money
    
    
    2,961
    
    
    $
    24.14
    
    
    
    2,576
    
    
    $
    39.77
    
    
    
    5,537
    
    
    $
    31.41Out-of-the money(1)
    
    
    
    
    
    
    
    
    
    
    64
    
    
    
    54.52
    
    
    
    64
    
    
    
    54.52Total
options outstanding
    
    
    2,961
    
    
    
    
    
    
    
    2,640
    
    
    
    
    
    
    
    5,601
 
 (1)
    
    Out-of-the-money options are those options with an exercise price equal to or
greater than the fair market value of our common stock, $53.98, at the close of business on
June 30, 2006. Available Information
  26




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Foreign
currency exchange risk
   
 Item 4. Controls and Procedures
     27




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Our quarterly revenue and operating results may vary significantly in future periods and our
stock price may decline.
  We are dependent on Novartis 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.*
   28




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##### Table of Contents



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 Novartis with respect to blood screening would have a material
adverse effect on our business.*
    29




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##### Table of Contents



If our TIGRIS instrument reliability does not meet market expectations, we may be unable to
retain our existing customers and attract new customers.
  We and our customers are subject to various governmental regulations, and we may incur
significant expenses to comply with, and experience delays in our product commercialization as a
result of, these regulations.*
      30




---



##### Table of Contents



We face intense competition, and our failure to compete effectively could decrease our revenues
and harm our profitability and results of operations.
     Our gross profit margin percentage on the sale of blood screening assays will decrease upon the
implementation of individual donor testing.
  31




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##### Table of Contents



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.
  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.
     32




---



##### Table of Contents



The diagnostic products industry has a history of patent and other intellectual property
litigation, and we have been and may continue to be involved in costly intellectual property
lawsuits.*
   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.
  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.*
  33




---



##### Table of Contents



Our future success will depend in part upon our ability to enhance existing products and to
develop and introduce new products.*
   We recently entered into collaboration agreements to develop NAT products for industrial testing
applications. We have limited experience operating in these markets and may not successfully
develop commercially viable products.
  We expect to continue to incur significant research and development expenses, which may make it
difficult for us to maintain profitability.
  34




---



##### Table of Contents



We may not have financing for future capital requirements, which may prevent us from addressing
gaps in our product offerings or improving our technology.
    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 control, quality assurance and costs.
    If we or our contract manufacturers are unable to manufacture our products in sufficient
quantities, on a timely basis, at acceptable costs and in compliance with regulatory
requirements, our ability to sell our products will be harmed.
   35




---



##### Table of Contents



Our products are subject to recalls even after receiving FDA approval or clearance.
  Our sales to international markets are subject to additional risks.
   
    
    the imposition of government controls,
    
    export license requirements,
    
    economic and political instability,
 36




---



##### Table of Contents




    
    price controls,
    
    trade restrictions and tariffs,
    
    differing local product preferences and product requirements, and
    
    changes in foreign medical reimbursement and coverage policies and programs.
   If third-party payors do not reimburse our customers for the use of our clinical diagnostic
products or if they reduce reimbursement levels, our ability to sell our products will be
harmed.
    Disruptions in the supply of raw materials and consumable goods from our single source
suppliers, including Roche Molecular Biochemicals, which is an affiliate of one of our primary
competitors, could result in a significant disruption in sales and profitability.
  37




---



##### Table of Contents



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.
  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.
   We may acquire other businesses or form collaborations, strategic alliances and joint ventures
that could decrease our profitability, result in dilution to stockholders or cause us to incur
debt or significant expense.
   38




---



##### Table of Contents



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.
  If we use biological and hazardous materials in a manner that causes injury or violates laws, we
may be liable for damages.
  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 our
stockholders may favor.
  
    
    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.
   We may not successfully integrate acquired businesses or technologies.
  
    
    the inability to retain or replace 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;
 39




---



##### Table of Contents




    
    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 could 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 could be difficult and costly; and
    
    integrating or completing the development and application of any acquired technologies,
which could 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.
  Future changes in financial accounting standards or practices or existing taxation rules or
practices may cause adverse unexpected revenue or expense fluctuations and affect our reported
results of operations.
  Information technology systems implementation issues could disrupt our internal operations and
adversely affect our financial results.
  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.
  40




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##### Table of Contents



Compliance with changing corporate governance and public disclosure regulations may result in
additional expenses.
  
 Item 4. Submission of Matters to a Vote of Security Holders
  (1)
    
    To elect two (2) directors to hold office until the 2009 Annual Meeting of
Stockholders.
 
 
 (2)
    
    To approve an amendment to The 2003 Incentive Award Plan of the Company to increase the
number of shares authorized for issuance by 3,000,000 shares.
 
 (3)
    
    To ratify the selection by the Audit Committee of our Board of Directors of Ernst &
Young LLP as our independent auditors for the fiscal year ending December 31, 2006. The
number of votes were as follows:
 
 41




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##### Table of Contents



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, 2003.10.93
    
    Amended and Restated Employment Agreement effective May 17, 2006 by and between Gen-Probe Incorporated and
Henry L. Nordhoff10.94*
    
    Amendment No. 1 to License, Development and Cooperation Agreement effective May 24, 2006 by and between
Gen-Probe Incorporated and DiagnoCure, Inc.10.95
    
    Amendment No. 9 effective July 1, 2006 to the Agreement dated as of June 11, 1998 between Gen-Probe
Incorporated and Chiron Corporation (now Novartis Vaccines and Diagnostics, Inc.)31.1
    
    Certification dated August 3, 2006, 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 August 3, 2006, 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 August 3, 2006, 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 August 3, 2006, 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.*
    
    Gen-Probe has requested confidential treatment with respect to certain portions of this
exhibit.(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. 42




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##### Table of Contents



SIGNATURES
  DATE: August 3, 2006
    
    By:
    
    /s/ Henry L. NordhoffHenry L. NordhoffChairman, President and Chief Executive Officer(Principal Executive Officer)DATE: August 3, 2006
    
    By:
    
    /s/ Herm RosenmanHerm RosenmanVice President  Finance and Chief FinancialOfficer (Principal Financial Officer andPrincipal Accounting Officer)