##### 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 For the quarterly period ended September 30, 2007
  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
    
    
    14Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    25PART IIItem 1. Legal Proceedings
    
    
    25Item 1A. Risk Factors
    
    
    25Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    40Item 6. Exhibits
    
    
    41SIGNATURES
    
    
    42EXHIBIT 10.100EXHIBIT 10.101EXHIBIT 10.102EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



GEN-PROBE INCORPORATED
 CONSOLIDATED BALANCE SHEETS
  September 30,
    
    
    December 31,2007
    
    
    2006(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    66,888
    
    
    $
    87,905Short-term investments
    
    
    328,185
    
    
    
    202,008Trade accounts receivable, net of allowance
for doubtful accounts of $750 and $670 at
September 30, 2007 and December 31, 2006,
respectively
    
    
    38,235
    
    
    
    25,880Accounts receivable  other
    
    
    5,166
    
    
    
    1,646Inventories
    
    
    49,186
    
    
    
    52,056Deferred income tax  short term
    
    
    6,673
    
    
    
    7,247Prepaid income tax
    
    
    16,229
    
    
    
    Prepaid expenses
    
    
    17,874
    
    
    
    11,362Other current assets
    
    
    5,374
    
    
    
    2,583Total current assets
    
    
    533,810
    
    
    
    390,687Property, plant and equipment, net
    
    
    131,245
    
    
    
    134,614Capitalized software
    
    
    16,552
    
    
    
    18,437Goodwill
    
    
    18,621
    
    
    
    18,621Deferred income tax  long term
    
    
    2,064
    
    
    
    2,064License, manufacturing access fees and other assets
    
    
    58,947
    
    
    
    59,416Total assets
    
    $
    761,239
    
    
    $
    623,839LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    14,696
    
    
    $
    13,586Accrued salaries and employee benefits
    
    
    23,055
    
    
    
    16,723Other accrued expenses
    
    
    8,683
    
    
    
    3,320Income tax payable
    
    
    732
    
    
    
    14,075Deferred income tax  short term
    
    
    103
    
    
    
    Deferred revenue
    
    
    1,623
    
    
    
    921Total current liabilities
    
    
    48,892
    
    
    
    48,625Non-current income tax payable
    
    
    4,766
    
    
    
    Deferred income tax  long term
    
    
    360
    
    
    
    Deferred revenue
    
    
    3,167
    
    
    
    3,667Deferred rent
    
    
    40
    
    
    
    128Deferred compensation plan liabilities
    
    
    1,755
    
    
    
    1,211Commitments 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, 53,718,400 and
52,233,656 shares issued and outstanding at
September 30, 2007 and December 31, 2006,
respectively
    
    
    5
    
    
    
    5Additional paid-in capital
    
    
    400,883
    
    
    
    334,184Accumulated other comprehensive income (loss)
    
    
    581
    
    
    
    (5
    )Retained earnings
    
    
    300,790
    
    
    
    236,024Total stockholders equity
    
    
    702,259
    
    
    
    570,208Total liabilities and stockholders equity
    
    $
    761,239
    
    
    $
    623,839
  3




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##### Table of Contents



GEN-PROBE INCORPORATED
 CONSOLIDATED STATEMENTS OF INCOME
 
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Product sales
    
    $
    97,402
    
    
    $
    83,470
    
    
    $
    278,451
    
    
    $
    239,811Collaborative research revenue
    
    
    3,118
    
    
    
    1,470
    
    
    
    11,239
    
    
    
    14,743Royalty and license revenue
    
    
    1,213
    
    
    
    7,287
    
    
    
    14,375
    
    
    
    9,151Total revenues
    
    
    101,733
    
    
    
    92,227
    
    
    
    304,065
    
    
    
    263,705Operating expenses:Cost of product sales
    
    
    31,810
    
    
    
    24,298
    
    
    
    91,148
    
    
    
    76,207Research and development
    
    
    27,582
    
    
    
    24,178
    
    
    
    72,813
    
    
    
    63,833Marketing and sales
    
    
    9,651
    
    
    
    9,526
    
    
    
    28,580
    
    
    
    27,533General and administrative
    
    
    11,380
    
    
    
    12,748
    
    
    
    34,742
    
    
    
    34,104Total operating expenses
    
    
    80,423
    
    
    
    70,750
    
    
    
    227,283
    
    
    
    201,677Income from operations
    
    
    21,310
    
    
    
    21,477
    
    
    
    76,782
    
    
    
    62,028Total other income, net
    
    
    3,333
    
    
    
    1,921
    
    
    
    8,610
    
    
    
    5,081Income before income tax
    
    
    24,643
    
    
    
    23,398
    
    
    
    85,392
    
    
    
    67,109Income tax expense
    
    
    7,392
    
    
    
    8,587
    
    
    
    19,664
    
    
    
    24,745Net income
    
    $
    17,251
    
    
    $
    14,811
    
    
    $
    65,728
    
    
    $
    42,364Net income per share:Basic
    
    $
    0.32
    
    
    $
    0.29
    
    
    $
    1.25
    
    
    $
    0.82Diluted
    
    $
    0.31
    
    
    $
    0.28
    
    
    $
    1.21
    
    
    $
    0.80Weighted average shares outstanding:Basic
    
    
    53,221
    
    
    
    51,638
    
    
    
    52,661
    
    
    
    51,407Diluted
    
    
    54,857
    
    
    
    53,180
    
    
    
    54,210
    
    
    
    53,001
  4




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##### Table of Contents



GEN-PROBE INCORPORATED
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 Nine Months EndedSeptember 30,2007
    
    
    2006Operating activitiesNet income
    
    $
    65,728
    
    
    $
    42,364Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    25,518
    
    
    
    19,752Stock-based compensation charges
    
    
    14,487
    
    
    
    17,755Stock option income tax benefits
    
    
    2,031
    
    
    
    111Excess tax benefit from employee stock options
    
    
    (13,055
    )
    
    
    (8,232
    )Loss on disposal of property and equipment
    
    
    202
    
    
    
    4Changes in assets and liabilities:Accounts receivable
    
    
    (15,861
    )
    
    
    7,550Inventories
    
    
    2,660
    
    
    
    (5,338
    )Prepaid expenses
    
    
    (6,538
    )
    
    
    (682
    )Other current assets
    
    
    (2,756
    )
    
    
    507Other long term assets
    
    
    (930
    )
    
    
    (1,305
    )Accounts payable
    
    
    1,116
    
    
    
    (3,103
    )Accrued salaries and employee benefits
    
    
    6,328
    
    
    
    2,821Other accrued expenses
    
    
    5,343
    
    
    
    624Income tax payable
    
    
    (14,544
    )
    
    
    2,037Deferred revenue
    
    
    202
    
    
    
    (3,975
    )Deferred income tax
    
    
    794
    
    
    
    645Deferred rent
    
    
    (88
    )
    
    
    (87
    )Deferred compensation plan liabilities
    
    
    544
    
    
    
    593Net cash provided by operating activities
    
    
    71,181
    
    
    
    72,041Investing activitiesProceeds from sales and maturities of short-term investments
    
    
    57,391
    
    
    
    83,641Purchases of short-term investments
    
    
    (182,449
    )
    
    
    (104,163
    )Purchases of property, plant and equipment
    
    
    (17,674
    )
    
    
    (40,126
    )Capitalization of intangible assets, including license fees
    
    
    (2,127
    )
    
    
    (2,245
    )Investment in Qualigen
    
    
    
    
    
    
    (6,993
    )Other assets
    
    
    (334
    )
    
    
    (223
    )Net cash used in investing activities
    
    
    (145,193
    )
    
    
    (70,109
    )Financing activitiesRepurchase and retirement of restricted stock for payment of taxes
    
    
    (1,020
    )
    
    
    Excess tax benefit from employee stock options
    
    
    13,055
    
    
    
    8,232Proceeds from issuance of common stock
    
    
    40,677
    
    
    
    19,089Net cash provided by financing activities
    
    
    52,712
    
    
    
    27,321Effect of exchange rate changes on cash and cash equivalents
    
    
    283
    
    
    
    485Net (decrease)/increase in cash and cash equivalents
    
    
    (21,017
    )
    
    
    29,738Cash and cash equivalents at the beginning of period
    
    
    87,905
    
    
    
    32,328Cash and cash equivalents at the end of period
    
    $
    66,888
    
    
    $
    62,066
  5




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##### Table of Contents



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




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##### Table of Contents



Use of estimates
  Foreign currencies
   Share-based payments
    Stock Option Plans
    
    
    ESPPThree Months
    
    
    Nine Months
    
    
    Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,
    
    
    Ended September 30,
    
    
    Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Risk-free interest rate
    
    
    4.7
    %
    
    
    4.8
    %
    
    
    4.7
    %
    
    
    4.8
    %
    
    
    5.0
    %
    
    
    5.0
    %
    
    
    5.0
    %
    
    
    4.4
    %Volatility
    
    
    37
    %
    
    
    42
    %
    
    
    36
    %
    
    
    42
    %
    
    
    29
    %
    
    
    38
    %
    
    
    29
    %
    
    
    40
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expected term (years)
    
    
    4.2
    
    
    
    4.2
    
    
    
    4.2
    
    
    
    4.5
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5Resulting average fair
value
    
    $
    22.42
    
    
    $
    19.87
    
    
    $
    21.13
    
    
    $
    20.93
    
    
    $
    13.82
    
    
    $
    13.48
    
    
    $
    12.89
    
    
    $
    12.99
 7




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##### Table of Contents



Weighted Average
    
    
    UnrecognizedRemaining Expense
    
    
    Expense as ofAwards
    
    Life (Years)
    
    
    September 30, 2007Options
    
    
    1.7
    
    
    $
    42,016ESPP
    
    
    0.2
    
    
    
    76Restricted stock
    
    
    1.7
    
    
    
    12,459Deferred Issuance Restricted Stock
    
    
    1.5
    
    
    
    2,371$
    56,922
  Impact of SFAS No. 123(R)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Cost of product sales
    
    $
    663
    
    
    $
    743
    
    
    $
    2,345
    
    
    $
    1,366Research and development
    
    
    1,206
    
    
    
    2,024
    
    
    
    3,076
    
    
    
    5,698Marketing and sales
    
    
    581
    
    
    
    863
    
    
    
    1,552
    
    
    
    2,335General and administrative
    
    
    1,755
    
    
    
    2,749
    
    
    
    4,950
    
    
    
    6,755Reduction of operating income
before income tax
    
    
    4,205
    
    
    
    6,379
    
    
    
    11,923
    
    
    
    16,154Income tax benefit
    
    
    (1,012
    )
    
    
    (2,331
    )
    
    
    (4,441
    )
    
    
    (5,782
    )Reduction of net income
    
    $
    3,193
    
    
    $
    4,048
    
    
    $
    7,482
    
    
    $
    10,372Reduction of net income per share:Basic
    
    $
    0.06
    
    
    $
    0.08
    
    
    $
    0.14
    
    
    $
    0.20Diluted
    
    $
    0.06
    
    
    $
    0.08
    
    
    $
    0.14
    
    
    $
    0.19
   8




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    17,251
    
    
    $
    14,811
    
    
    $
    65,728
    
    
    $
    42,364Weighted average shares outstanding  Basic
    
    
    53,221
    
    
    
    51,638
    
    
    
    52,661
    
    
    
    51,407Effect of dilutive common stock options
outstanding
    
    
    1,636
    
    
    
    1,542
    
    
    
    1,549
    
    
    
    1,594Weighted average shares outstanding 
Diluted
    
    
    54,857
    
    
    
    53,180
    
    
    
    54,210
    
    
    
    53,001Net income per share:Basic
    
    $
    0.32
    
    
    $
    0.29
    
    
    $
    1.25
    
    
    $
    0.82Diluted
    
    $
    0.31
    
    
    $
    0.28
    
    
    $
    1.21
    
    
    $
    0.80
     Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    17,251
    
    
    $
    14,811
    
    
    $
    65,728
    
    
    $
    42,364Change in unrealized gain (loss) on
investments
    
    
    1,466
    
    
    
    1,023
    
    
    
    1,015
    
    
    
    462Foreign currency translation adjustment
    
    
    (440
    )
    
    
    (68
    )
    
    
    (429
    )
    
    
    1,050Other comprehensive income, net
    
    
    1,026
    
    
    
    955
    
    
    
    586
    
    
    
    1,512Comprehensive income
    
    $
    18,277
    
    
    $
    15,766
    
    
    $
    66,314
    
    
    $
    43,876
 9




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##### Table of Contents



Inventories
 September 30,
    
    
    December 31,2007
    
    
    2006Raw materials and supplies
    
    $
    8,205
    
    
    $
    9,479Work in process
    
    
    22,641
    
    
    
    25,018Finished goods
    
    
    18,340
    
    
    
    17,559$
    49,186
    
    
    $
    52,056
 Property, plant and equipment
 September 30,
    
    
    December 31,2007
    
    
    2006Land
    
    $
    13,862
    
    
    $
    13,862Building
    
    
    69,946
    
    
    
    70,928Machinery and equipment
    
    
    137,518
    
    
    
    128,572Tenant improvements
    
    
    31,529
    
    
    
    28,185Furniture and fixtures
    
    
    16,037
    
    
    
    15,995Construction in-progress
    
    
    479
    
    
    
    618Property, plant and equipment (at cost)
    
    
    269,371
    
    
    
    258,160Less accumulated depreciation and amortization
    
    
    (138,126
    )
    
    
    (123,546
    )Property, plant and equipment (net)
    
    $
    131,245
    
    
    $
    134,614
 License, manufacturing access fees and other assets
 September 30,
    
    
    December 31,2007
    
    
    2006Patents
    
    $
    17,217
    
    
    $
    16,689Purchased intangible assets
    
    
    33,636
    
    
    
    33,636License and manufacturing access fees
    
    
    53,326
    
    
    
    51,726Investment in Molecular Profiling Institute, Inc.
    
    
    2,500
    
    
    
    2,500Investment in Qualigen, Inc.
    
    
    6,993
    
    
    
    6,993Other assets
    
    
    3,220
    
    
    
    2,293116,892
    
    
    
    113,837Less accumulated amortization
    
    
    (57,945
    )
    
    
    (54,421
    )$
    58,947
    
    
    $
    59,416
   Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMunicipal securities
    
    $
    326,245
    
    
    $
    909
    
    
    $
    (376
    )
    
    $
    326,778Foreign debt securities
    
    
    1,407
    
    
    
    
    
    
    
    
    
    
    
    1,407Total short-term investments
    
    $
    327,652
    
    
    $
    909
    
    
    $
    (376
    )
    
    $
    328,185
 10




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##### Table of Contents



Less than 12 Months
    
    
    More than 12 MonthsEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesMunicipal securities
    
    $
    25,810
    
    
    $
    (78
    )
    
    $
    81,815
    
    
    $
    (298
    )Foreign debt securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total short-term investments
    
    $
    25,810
    
    
    $
    (78
    )
    
    $
    81,815
    
    
    $
    (298
    )
         Stock options
  11




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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, 2006
    
    
    6,300
    
    
    $
    34.99Granted
    
    
    1,054
    
    
    
    58.12Exercised
    
    
    (1,350
    )
    
    
    28.85Cancelled
    
    
    (338
    )
    
    
    44.29Outstanding at September 30, 2007
    
    
    5,666
    
    
    
    40.13
    
    
    
    7.4
    
    
    $
    150,268Exercisable at September 30, 2007
    
    
    3,022
    
    
    $
    30.90
    
    
    
    6.2
    
    
    $
    108,353
   Exercisable
    
    
    Unexercisable
    
    
    TotalWeighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseAs of September 30, 2007
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceIn-the-Money
    
    
    3,022
    
    
    $
    30.90
    
    
    
    2,644
    
    
    $
    50.73
    
    
    
    5,666
    
    
    $
    40.13Out-of-the-Money
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Options Outstanding
    
    
    3,022
    
    
    
    
    
    
    
    2,644
    
    
    
    
    
    
    
    5,666
  WeightedAverageWeighted Average
    
    
    RemainingNumber of
    
    
    Grant-Date
    
    
    ContractualShares
    
    
    Fair Value
    
    
    Life (Years)Non-vested at December 31, 2006
    
    
    2,959
    
    
    $
    19.51Granted
    
    
    1,054
    
    
    
    21.13Vested
    
    
    (1,035
    )
    
    
    18.69Forfeited
    
    
    (334
    )
    
    
    19.39Non-vested at September 30, 2007
    
    
    2,644
    
    
    $
    20.62
    
    
    
    1.4
 12




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##### Table of Contents



Balance at December 31, 2006
    
    $
    570,208Net income
    
    
    65,728Cumulative effect adjustment upon adoption of FIN No. 48
    
    
    (962
    )Other comprehensive income, net
    
    
    586Net proceeds from the issuance of common stock
    
    
    38,937Purchase of common shares through ESPP
    
    
    1,740Purchase of common stock by board members
    
    
    98Cancellation of restricted stock awards
    
    
    (260
    )Repurchase and retirement of restricted stock for payment of taxes
    
    
    (1,020
    )Stock-based compensation expense  restricted stock
    
    
    2,726Stock-based compensation expense  all other
    
    
    11,923Stock-based compensation  net capitalized to inventory
    
    
    (500
    )Tax benefit from the exercise of stock options
    
    
    13,055Balance at September 30, 2007
    
    $
    702,259
   Digene Corporation
     13




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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
   14




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##### Table of Contents



Corporate Collaborations
   Staphylococcus aureus
 Product Development
    15




---



##### Table of Contents



Revenues
  Product sales
   Collaborative research revenue
    16




---



##### Table of Contents



Royalty and license revenue
  Cost of product sales
     Research and development
    17




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##### Table of Contents



Critical accounting policies and estimates
   New accounting requirement
  Results of Operations
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    $ Change
    
    
    % Change
    
    
    2007
    
    
    2006
    
    
    $ Change
    
    
    % Change(In millions, except per share data)Statement of income:Revenues:Product sales
    
    $
    97.4
    
    
    $
    83.5
    
    
    $
    13.9
    
    
    
    17
    %
    
    $
    278.5
    
    
    $
    239.8
    
    
    $
    38.7
    
    
    
    16
    %Collaborative research
revenue
    
    
    3.1
    
    
    
    1.5
    
    
    
    1.6
    
    
    
    107
    %
    
    
    11.2
    
    
    
    14.7
    
    
    
    (3.5
    )
    
    
    (24
    )%Royalty and license revenue
    
    
    1.2
    
    
    
    7.3
    
    
    
    (6.1
    )
    
    
    (84
    )%
    
    
    14.4
    
    
    
    9.2
    
    
    
    5.2
    
    
    
    57
    %Total revenues
    
    
    101.7
    
    
    
    92.3
    
    
    
    9.4
    
    
    
    10
    %
    
    
    304.1
    
    
    
    263.7
    
    
    
    40.4
    
    
    
    15
    %Operating expenses:Cost of product sales
    
    
    31.8
    
    
    
    24.3
    
    
    
    7.5
    
    
    
    31
    %
    
    
    91.2
    
    
    
    76.2
    
    
    
    15.0
    
    
    
    20
    %Research and development
    
    
    27.6
    
    
    
    24.2
    
    
    
    3.4
    
    
    
    14
    %
    
    
    72.8
    
    
    
    63.8
    
    
    
    9.0
    
    
    
    14
    %Marketing and sales
    
    
    9.6
    
    
    
    9.5
    
    
    
    0.1
    
    
    
    1
    %
    
    
    28.6
    
    
    
    27.6
    
    
    
    1.0
    
    
    
    4
    %General and administrative
    
    
    11.4
    
    
    
    12.8
    
    
    
    (1.4
    )
    
    
    (11
    )%
    
    
    34.7
    
    
    
    34.1
    
    
    
    0.6
    
    
    
    2
    %Total operating expenses
    
    
    80.4
    
    
    
    70.8
    
    
    
    9.6
    
    
    
    14
    %
    
    
    227.3
    
    
    
    201.7
    
    
    
    25.6
    
    
    
    13
    %Income from operations
    
    
    21.3
    
    
    
    21.5
    
    
    
    (0.2
    )
    
    
    (1
    )%
    
    
    76.8
    
    
    
    62.0
    
    
    
    14.8
    
    
    
    24
    %Total other income, net
    
    
    3.3
    
    
    
    1.9
    
    
    
    1.4
    
    
    
    74
    %
    
    
    8.6
    
    
    
    5.1
    
    
    
    3.5
    
    
    
    69
    %Income tax expense
    
    
    7.4
    
    
    
    8.6
    
    
    
    (1.2
    )
    
    
    (14
    )%
    
    
    19.7
    
    
    
    24.7
    
    
    
    (5.0
    )
    
    
    (20
    )%Net income
    
    $
    17.2
    
    
    $
    14.8
    
    
    $
    2.4
    
    
    
    16
    %
    
    $
    65.7
    
    
    $
    42.4
    
    
    $
    23.3
    
    
    
    55
    %Net income per shareBasic
    
    $
    0.32
    
    
    $
    0.29
    
    
    $
    0.03
    
    
    
    10
    %
    
    $
    1.25
    
    
    $
    0.82
    
    
    $
    0.43
    
    
    
    52
    %Diluted
    
    $
    0.31
    
    
    $
    0.28
    
    
    $
    0.03
    
    
    
    11
    %
    
    $
    1.21
    
    
    $
    0.80
    
    
    $
    0.41
    
    
    
    51
    %Weighted average shares
outstandingBasic
    
    
    53.2
    
    
    
    51.6
    
    
    
    
    
    
    
    
    
    
    
    52.7
    
    
    
    51.4Diluted
    
    
    54.9
    
    
    
    53.2
    
    
    
    
    
    
    
    
    
    
    
    54.2
    
    
    
    53.0
  18




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Product sales
    Collaborative research revenue
    19




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Royalty and license revenue
    Cost of product sales
     20




---



##### Table of Contents



Research and development
   Marketing and sales
  General and administrative
  Total other income, net
  Income tax expense
  21




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Liquidity and capital resources
  September 30,
    
    
    December 31,2007
    
    
    2006Cash, cash equivalents and short-term investments
    
    $
    395,073
    
    
    $
    289,913Working capital
    
    $
    484,918
    
    
    $
    342,062Current ratio
    
    
    11:1
    
    
    
    8:1
   Nine Months EndedSeptember 30,2007
    
    
    2006
    
    
    $ ChangeCash provided by (used in):Operating activities
    
    $
    71,181
    
    
    $
    72,041
    
    
    $
    (860
    )Investing activities
    
    
    (145,193
    )
    
    
    (70,109
    )
    
    
    75,084Financing activities
    
    
    52,712
    
    
    
    27,321
    
    
    
    25,391Purchases of property,
plant and equipment
(included in investing
activities above)
    
    $
    (17,674
    )
    
    $
    (40,126
    )
    
    $
    (22,452
    )
     22




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##### Table of Contents



Contractual obligations and commercial commitments
  Total
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    ThereafterOperating leases (1)
    
    $
    454
    
    
    $
    217
    
    
    $
    167
    
    
    $
    70
    
    
    $
    
    
    
    $
    Material purchase commitments (2)
    
    
    34,244
    
    
    
    6,254
    
    
    
    19,739
    
    
    
    5,438
    
    
    
    813
    
    
    
    2,000Collaborative commitments (3)
    
    
    13,259
    
    
    
    443
    
    
    
    10,766
    
    
    
    1,400
    
    
    
    650
    
    
    
    Total (4)
    
    $
    47,957
    
    
    $
    6,914
    
    
    $
    30,672
    
    
    $
    6,908
    
    
    $
    1,463
    
    
    $
    2,000
 
 (1)
    
    Reflects obligations on facilities under operating leases in place as of September
30, 2007. Future minimum lease payments are included in the table above.(2)
    
    Amounts represent our minimum purchase commitments from key vendors for the TIGRIS
and Panther instruments, as well as raw materials used in manufacturing. Of the $21.4 million
expected to be used to purchase TIGRIS instruments, we anticipate that approximately $15.4
million of these instruments will be sold to Novartis. For the
Panther instrument, these amounts
include $11.5
million expected to be used to purchase prototype, validation, pre-production and production
instruments pursuant to the Stratec Development Agreement and potential
minimum purchase commitments under our Supply Agreement. Our obligations under the Supply Agreement are
contingent on successful completion of all activities under the Development Agreement.(3)
    
    In addition to the minimum payments due under our collaborative agreements included
in the table above, we may be required to pay up to $11.1 million in milestone payments, plus
royalties on net sales of any products using specified technology. We may also be required to
pay up to $7.5 million in future development costs in the form of milestone payments.(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.   23




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##### Table of Contents



Available Information
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Foreign Currency Exchange Risk
   24




---



##### Table of Contents



Item 4. Controls and Procedures
     
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  25




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##### Table of Contents



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.*
    26




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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.
    If our TIGRIS instrument reliability does not meet market expectations, we may be unable to
retain our existing customers and attract new customers.*
  27




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##### 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 face intense competition, and our failure to compete effectively could decrease our revenues
and harm our profitability and results of operations.*
     28




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##### Table of Contents



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.
  Failure to manufacture our products in accordance with product specifications could result in
increased costs, lost revenues, customer dissatisfaction or voluntary product recalls, any of
which could harm our profitability and commercial reputation.*
  29




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##### Table of Contents



Disruptions in the supply of raw materials and consumable goods or issues associated with the
quality thereof 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.*
   We have only one third-party manufacturer for each of our instrument product lines, which
exposes us to increased risks associated with production delays, delivery schedules,
manufacturing capability, quality control, quality assurance and costs.
    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



Our gross profit margin percentage on the sale of blood screening assays will decrease upon the
implementation of smaller pool size testing and individual donor testing.*
   31




---



##### 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




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##### 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.
  33




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##### Table of Contents



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.*
   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.*
  We expect to continue to incur significant research and development expenses, which may make it
difficult for us to maintain profitability.
  34




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##### 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.
    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




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##### 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,
    
    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.
  36




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##### Table of Contents



We are dependent on technologies we license, and if we fail to maintain our licenses or 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.*
   37




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##### Table of Contents



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.
   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, and provisions of
Delaware law 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.
 38




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##### Table of Contents



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;
    
    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.
  Information technology systems implementation issues could disrupt our internal operations and
adversely affect our financial results.
  39




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##### Table of Contents



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.
  Compliance with changing corporate governance and public disclosure regulations may result in
additional expenses.
  
 Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
 Total Numberof SharesPurchased
    
    
    Approximateas Part of
    
    
    Dollar Value ofPublicly
    
    
    Shares that MayTotal Number
    
    
    Average
    
    
    Announced
    
    
    Yet Be Purchasedof Shares
    
    
    Price Paid
    
    
    Plans or
    
    
    Under the Plans orPurchased
    
    
    Per Share
    
    
    Programs
    
    
    ProgramsJuly 1-31, 2007
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    August 1-31, 2007
    
    
    16,742
    
    
    
    60.95
    
    
    
    
    
    
    
    September 1-30, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    16,742
    (1)
    
    $
    60.95
    
    
    
    
    
    
    $
    
 
 (1)
    
    During the third quarter of 2007, we repurchased and
retired 16,742 shares of our common stock, at an average
per share price of $60.95, withheld by us to satisfy
employee tax obligations upon vesting of restricted stock
granted under our 2003 Incentive Award Plan. We may make
similar repurchases in the future to satisfy employee tax
obligations upon vesting of restricted stock and Deferred
Issuance Restricted Stock. As of September 30, 2007, we had
an aggregate of 259,980 shares of restricted stock and
80,000 shares of Deferred Issuance Restricted Stock Awards
outstanding. 40




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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(2)
    
    Certificate of Amendment of Amended and Restated Certificate of Incorporation of
Gen-Probe Incorporated.3.3(3)
    
    Form of Amended and Restated Bylaws of Gen-Probe Incorporated.3.4(4)
    
    Certificate of Elimination of the Series A Junior Participating Preferred Stock of
Gen-Probe Incorporated.4.1(1)
    
    Specimen common stock certificate.10.100*
    
    Development Agreement for Panther Instrument System, effective November 22, 2006,
by and between the Company and STRATEC Biomedical Systems AG.10. 101*
    
    Supply Agreement for Panther Instrument System, effective November 22, 2006, by and
between the Company and STRATEC Biomedical Systems AG.10. 102*
    
    Letter Agreement regarding Development Agreement for Panther Instrument System,
dated July 17, 2007, by and between the Company and STRATEC Biomedical Systems AG.31.1
    
    Certification dated November 5, 2007, of Principal Executive Officer required
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification dated November 5, 2007, of Principal Financial Officer required
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification dated November 5, 2007, of Principal Executive Officer required
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification dated November 5, 2007, of Principal Financial Officer required
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
 
 
    
    Filed herewith.*
    
    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 Quarterly Report on Form 10-Q filed with the SEC on
August 9, 2004.(3)
    
    Incorporated by reference to Gen-Probes Report on Form 8-K filed with the SEC on February
14, 2007.(4)
    
    Incorporated by reference to Gen-Probes Annual Report on Form 10-K for the year ended
December 31, 2006 filed with the SEC on February 23, 2007. 41




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##### Table of Contents



SIGNATURES
  GEN-PROBE INCORPORATEDDATE: November 5, 2007
    By:
    /s/ Henry L. NordhoffHenry L. NordhoffChairman, President and Chief Executive Officer
(Principal Executive Officer)DATE: November 5, 2007
    By:
    /s/ Herm RosenmanHerm RosenmanSenior Vice President  Finance
and Chief Financial
Officer (Principal Financial Officer and
Principal Accounting Officer) 42