##### 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
    
    33-0044608(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)10210 Genetic Center DriveSan Diego, CA
    
    92121(Address of Principal Executive
    
    (Zip Code)Offices)
 (858) 410-8000
 þ o
  þ o o
 o þ




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##### 



GEN-PROBE INCORPORATED
 TABLE OF CONTENTS
FORM 10-Q
 PagePART IItem 1. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    28PART II
    29Item 1. Legal Proceedings
    
    
    29Item 1A. Risk Factors
    
    
    29Item 6. Exhibits
    
    
    43SIGNATURES
    
    
    44EXHIBIT 4.5EXHIBIT 10.96EXHIBIT 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 31,2006
    
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    62,066
    
    
    $
    32,328Short-term investments
    
    
    209,454
    
    
    
    187,960Trade accounts receivable, net of allowance for
doubtful accounts of $670 and $790 at September
30, 2006 and December 31, 2005, respectively
    
    
    24,303
    
    
    
    31,930Accounts receivable  other
    
    
    2,171
    
    
    
    1,924Inventories
    
    
    44,524
    
    
    
    36,342Deferred income taxes
    
    
    10,030
    
    
    
    10,389Prepaid expenses
    
    
    11,450
    
    
    
    10,768Other current assets
    
    
    4,977
    
    
    
    4,184Total current assets
    
    
    368,975
    
    
    
    315,825Property, plant and equipment, net
    
    
    130,289
    
    
    
    105,190Capitalized software
    
    
    19,066
    
    
    
    20,952Goodwill
    
    
    18,621
    
    
    
    18,621License, manufacturing access fees and other assets
    
    
    56,074
    
    
    
    49,648Total assets
    
    $
    593,025
    
    
    $
    510,236LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    10,948
    
    
    $
    14,029Accrued salaries and employee benefits
    
    
    18,324
    
    
    
    14,910Other accrued expenses
    
    
    3,955
    
    
    
    3,264Income tax payable
    
    
    7,582
    
    
    
    13,192Deferred revenue
    
    
    4,296
    
    
    
    7,771Total current liabilities
    
    
    45,105
    
    
    
    53,166Deferred income taxes
    
    
    5,425
    
    
    
    5,124Deferred revenue
    
    
    3,833
    
    
    
    4,333Deferred rent
    
    
    153
    
    
    
    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, 52,051,761 and
51,137,541 shares issued and outstanding at
September 30, 2006 and December 31, 2005,
respectively
    
    
    5
    
    
    
    5Additional paid-in capital
    
    
    322,302
    
    
    
    281,907Deferred compensation
    
    
    
    
    
    
    (5,951
    )Accumulated other comprehensive income (loss)
    
    
    281
    
    
    
    (1,231
    )Retained earnings
    
    
    215,921
    
    
    
    172,643Total stockholders equity
    
    
    538,509
    
    
    
    447,373Total liabilities and stockholders equity
    
    $
    593,025
    
    
    $
    510,236
  3




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##### Table of Contents



GEN-PROBE INCORPORATED
 CONSOLIDATED STATEMENTS OF INCOME
 
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Product sales
    
    $
    83,470
    
    
    $
    68,941
    
    
    $
    239,811
    
    
    $
    193,651Collaborative research revenue
    
    
    1,470
    
    
    
    6,336
    
    
    
    14,743
    
    
    
    19,358Royalty and license revenue
    
    
    7,287
    
    
    
    994
    
    
    
    9,151
    
    
    
    4,984Total revenues
    
    
    92,227
    
    
    
    76,271
    
    
    
    263,705
    
    
    
    217,993Operating expenses:Cost of product sales
    
    
    23,801
    
    
    
    21,399
    
    
    
    74,715
    
    
    
    57,247Research and development
    
    
    24,178
    
    
    
    17,506
    
    
    
    63,833
    
    
    
    53,597Marketing and sales
    
    
    9,526
    
    
    
    7,555
    
    
    
    27,533
    
    
    
    22,365General and administrative
    
    
    12,748
    
    
    
    7,822
    
    
    
    34,104
    
    
    
    22,793Total operating expenses
    
    
    70,253
    
    
    
    54,282
    
    
    
    200,185
    
    
    
    156,002Income from operations
    
    
    21,974
    
    
    
    21,989
    
    
    
    63,520
    
    
    
    61,991Total other income, net
    
    
    1,921
    
    
    
    1,318
    
    
    
    5,081
    
    
    
    3,400Income before income taxes
    
    
    23,895
    
    
    
    23,307
    
    
    
    68,601
    
    
    
    65,391Income tax expense
    
    
    8,779
    
    
    
    6,890
    
    
    
    25,323
    
    
    
    22,057Net income
    
    $
    15,116
    
    
    $
    16,417
    
    
    $
    43,278
    
    
    $
    43,334Net income per share:Basic
    
    $
    0.29
    
    
    $
    0.32
    
    
    $
    0.84
    
    
    $
    0.86Diluted
    
    $
    0.28
    
    
    $
    0.31
    
    
    $
    0.82
    
    
    $
    0.83Weighted average shares outstanding:Basic
    
    
    51,638
    
    
    
    50,726
    
    
    
    51,407
    
    
    
    50,518Diluted
    
    
    53,180
    
    
    
    52,464
    
    
    
    53,001
    
    
    
    52,381
   4




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##### Table of Contents



GEN-PROBE INCORPORATED
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 Nine Months EndedSeptember 30,2006
    
    
    2005Operating activitiesNet income
    
    $
    43,278
    
    
    $
    43,334Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    19,752
    
    
    
    16,694Stock-based compensation charges  restricted stock
    
    
    1,601
    
    
    
    445Stock-based compensation charges  all other
    
    
    16,154
    
    
    
    Stock option income tax benefits
    
    
    111
    
    
    
    6,948Excess tax benefit from employee stock options
    
    
    (8,232
    )
    
    
    Loss on disposal of property and equipment
    
    
    4
    
    
    
    262Changes in assets and liabilities:Accounts receivable
    
    
    7,550
    
    
    
    (5,562
    )Inventories
    
    
    (6,830
    )
    
    
    (6,809
    )Prepaid expenses
    
    
    (682
    )
    
    
    (3,760
    )Other assets
    
    
    (798
    )
    
    
    (2,033
    )Accounts payable
    
    
    (3,103
    )
    
    
    5,525Accrued salaries and employee benefits
    
    
    3,414
    
    
    
    4,767Other accrued expenses
    
    
    624
    
    
    
    (1,169
    )Income tax payable
    
    
    2,615
    
    
    
    6,467Deferred revenue
    
    
    (3,975
    )
    
    
    5,253Deferred income taxes
    
    
    645
    
    
    
    (2,134
    )Deferred rent
    
    
    (87
    )
    
    
    (47
    )Net cash provided by operating activities
    
    
    72,041
    
    
    
    68,181Investing activitiesProceeds from sales and maturities of short-term investments
    
    
    83,641
    
    
    
    98,693Purchases of short-term investments
    
    
    (104,163
    )
    
    
    (105,672
    )Cash paid for acquisition of minority interest in Molecular Light Technology Limited
    
    
    
    
    
    
    (1,539
    )Purchases of property, plant and equipment
    
    
    (40,126
    )
    
    
    (29,894
    )Capitalization of intangible assets, including license and manufacturing access fees
    
    
    (2,245
    )
    
    
    (22,450
    )Cash paid
for investment in Qualigen, Inc.
    
    
    (6,993
    )
    
    
    Other assets
    
    
    (223
    )
    
    
    (821
    )Net cash used in investing activities
    
    
    (70,109
    )
    
    
    (61,683
    )Financing activitiesExcess tax benefit from employee stock options
    
    
    8,232
    
    
    
    Proceeds from issuance of common stock
    
    
    19,089
    
    
    
    13,963Net cash provided by financing activities
    
    
    27,321
    
    
    
    13,963Effect of exchange rate changes on cash and cash equivalents
    
    
    485
    
    
    
    (369
    )Net increase in cash and cash equivalents
    
    
    29,738
    
    
    
    20,092Cash and cash equivalents at the beginning of period
    
    
    32,328
    
    
    
    25,498Cash and cash equivalents at the end of period
    
    $
    62,066
    
    
    $
    45,590
  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 AverageRemaining
    
    
    UnrecognizedExpense
    
    
    Expense as ofAwards
    
    Life (Years)
    
    
    September 30, 2006Options
    
    
    1.8
    
    
    $
    40,424ESPP
    
    
    0.2
    
    
    
    71Restricted stock
    
    
    1.8
    
    
    
    8,948Deferred issuance restricted stock
    
    
    1.5
    
    
    
    2,013$
    51,456
  7




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##### Table of Contents



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




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##### Table of Contents



Assumptions
  Stock Option Plans
    
    
    ESPPThree Months
    
    
    Nine Months
    
    
    Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,
    
    
    Ended September 30,
    
    
    Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Risk-free interest rate
    
    
    4.8
    %
    
    
    3.9
    %
    
    
    4.8
    %
    
    
    3.8
    %
    
    
    5.0
    %
    
    
    3.4
    %
    
    
    4.4
    %
    
    
    3.0
    %Volatility
    
    
    42
    %
    
    
    45
    %
    
    
    42
    %
    
    
    53
    %
    
    
    38
    %
    
    
    40
    %
    
    
    40
    %
    
    
    48
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expected term (years)
    
    
    4.2
    
    
    
    5.4
    
    
    
    4.5
    
    
    
    4.9
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5Resulting average fair value
    
    $
    19.87
    
    
    $
    19.76
    
    
    $
    20.93
    
    
    $
    22.18
    
    
    $
    13.48
    
    
    $
    9.14
    
    
    $
    12.99
    
    
    $
    10.86
 Pro forma information for period prior to adoption of SFAS No. 123(R)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005Net income:As reported
    
    $
    16,417
    
    
    $
    43,334Stock-based
employee
compensation
expense included
in reported net
income, net of
related tax
effects
    
    
    87
    
    
    
    206Total stock-based
employee
compensation
expense
determined under
fair value based
method for all
options, net of
related tax
effects
    
    
    (3,926
    )
    
    
    (11,677
    )Pro forma net income
    
    $
    12,578
    
    
    $
    31,863Net income per share:As reportedBasic
    
    $
    0.32
    
    
    $
    0.86Diluted
    
    $
    0.31
    
    
    $
    0.83Pro formaBasic
    
    $
    0.25
    
    
    $
    0.63Diluted
    
    $
    0.24
    
    
    $
    0.61
 Impact of the adoption of SFAS No. 123(R)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2006
    
    
    September 30, 2006Cost of product sales
    
    $
    743
    
    
    $
    1,366Research and development
    
    
    2,024
    
    
    
    5,698Marketing and sales
    
    
    863
    
    
    
    2,335General and administrative
    
    
    2,749
    
    
    
    6,755Reduction of operating income before income taxes
    
    
    6,379
    
    
    
    16,154Income tax benefit
    
    
    (2,331
    )
    
    
    (5,782
    )Reduction of net income
    
    $
    4,048
    
    
    $
    10,372Reduction of net income per share:Basic
    
    $
    0.08
    
    
    $
    0.20Diluted
    
    $
    0.08
    
    
    $
    0.19
 9




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##### Table of Contents



Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMunicipal securities
    
    $
    204,917
    
    
    $
    330
    
    
    $
    (1,058
    )
    
    $
    204,189Foreign debt securities
    
    
    5,265
    
    
    
    
    
    
    
    
    
    
    
    5,265Total short-term investments
    
    $
    210,182
    
    
    $
    330
    
    
    $
    (1,058
    )
    
    $
    209,454
  Less than 12 Months
    
    
    More than 12 MonthsEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesMunicipal securities
    
    $
    36,903
    
    
    $
    (201
    )
    
    $
    89,304
    
    
    $
    (857
    )Foreign debt securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total short-term investments
    
    $
    36,903
    
    
    $
    (201
    )
    
    $
    89,304
    
    
    $
    (857
    )
    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    15,116
    
    
    $
    16,417
    
    
    $
    43,278
    
    
    $
    43,334Weighted average shares outstanding  Basic
    
    
    51,638
    
    
    
    50,726
    
    
    
    51,407
    
    
    
    50,518Effect of dilutive common stock options outstanding
    
    
    1,542
    
    
    
    1,738
    
    
    
    1,594
    
    
    
    1,863Weighted average shares outstanding  Diluted
    
    
    53,180
    
    
    
    52,464
    
    
    
    53,001
    
    
    
    52,381Net income per share:Basic
    
    $
    0.29
    
    
    $
    0.32
    
    
    $
    0.84
    
    
    $
    0.86Diluted
    
    $
    0.28
    
    
    $
    0.31
    
    
    $
    0.82
    
    
    $
    0.83
 10




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    15,116
    
    
    $
    16,417
    
    
    $
    43,278
    
    
    $
    43,334Foreign currency translation adjustment
    
    
    (68
    )
    
    
    (244
    )
    
    
    1,050
    
    
    
    (562
    )Change in unrealized gain (loss) on investments
    
    
    1,023
    
    
    
    (238
    )
    
    
    462
    
    
    
    (726
    )Comprehensive income
    
    $
    16,071
    
    
    $
    15,935
    
    
    $
    44,790
    
    
    $
    42,046
   Inventories
 September 30,
    
    
    December 31,2006
    
    
    2005Raw materials and supplies
    
    $
    6,160
    
    
    $
    5,430Work in process
    
    
    21,348
    
    
    
    17,934Finished goods
    
    
    17,016
    
    
    
    12,978$
    44,524
    
    
    $
    36,342
 Property, plant and equipment
 September 30,
    
    
    December 31,2006
    
    
    2005Land
    
    $
    13,862
    
    
    $
    9,100Buildings
    
    
    71,316
    
    
    
    39,535Machinery and equipment
    
    
    122,777
    
    
    
    106,433Tenant improvements
    
    
    26,570
    
    
    
    16,301Furniture and fixtures
    
    
    15,471
    
    
    
    10,346Construction in-progress
    
    
    990
    
    
    
    32,143Property, plant and equipment (at cost)
    
    
    250,986
    
    
    
    213,858Less accumulated depreciation and amortization
    
    
    (120,697
    )
    
    
    (108,668
    )Property, plant and equipment (net)
    
    $
    130,289
    
    
    $
    105,190
 11




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##### Table of Contents



License, manufacturing access fees and other assets
 September 30, 2006
    
    
    December 31, 2005Accumulated
    
    
    
    
    
    
    
    
    
    
    AccumulatedGross
    
    
    Amortization
    
    
    Net
    
    
    Gross
    
    
    Amortization
    
    
    NetIntangible assets subject to amortization:Capitalized software
    
    $
    25,142
    
    
    $
    6,076
    
    
    $
    19,066
    
    
    $
    25,142
    
    
    $
    4,190
    
    
    $
    20,952Patents
    
    
    16,468
    
    
    
    15,186
    
    
    
    1,282
    
    
    
    15,822
    
    
    
    14,817
    
    
    
    1,005Purchased intangible assets
    
    
    33,636
    
    
    
    32,582
    
    
    
    1,054
    
    
    
    33,636
    
    
    
    32,330
    
    
    
    1,306License and manufacturing access fees
    
    
    49,958
    
    
    
    5,713
    
    
    
    44,245
    
    
    
    48,354
    
    
    
    3,517
    
    
    
    44,837Total
    
    $
    125,204
    
    
    $
    59,557
    
    
    $
    65,647
    
    
    $
    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
    
    
    1,421,008
    
    
    
    50.20Exercised
    
    
    (760,239
    )
    
    
    22.85Cancelled
    
    
    (181,451
    )
    
    
    39.69Outstanding at September 30, 2006
    
    
    6,432,904
    
    
    $
    34.60
    
    
    
    7.18
    
    
    $
    79,072Exercisable at September 30, 2006
    
    
    3,069,699
    
    
    $
    24.91
    
    
    
    6.40
    
    
    $
    67,463
   WeightedWeighted
    
    
    AverageAverage
    
    
    RemainingNumber of
    
    
    Grant-Date
    
    
    ContractualShares
    
    
    Fair Value
    
    
    Life (Years)Non-vested at December 31, 2005
    
    
    3,013,536
    
    
    $
    17.09Granted
    
    
    1,421,008
    
    
    
    20.93Vested
    
    
    (890,983
    )
    
    
    14.33Forfeited
    
    
    (180,356
    )
    
    
    18.45Non-vested at September 30, 2006
    
    
    3,363,205
    
    
    $
    19.48
    
    
    
    7.89
 13




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##### Table of Contents



Balance at December 31, 2005
    
    $
    447,373Net income
    
    
    43,278Other comprehensive income, net
    
    
    1,512Net proceeds from the issuance of common stock
    
    
    17,369Purchase of common shares through ESPP
    
    
    1,720Purchase of common stock by board members
    
    
    105Stock-based compensation expense  restricted stock
    
    
    1,496Stock-based compensation expense  all other
    
    
    16,154Stock-based compensation  net capitalized to inventory
    
    
    1,159Tax benefit from the exercise of stock options
    
    
    8,343Balance at September 30, 2006
    
    $
    538,509
      14




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##### Table of Contents



15




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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
   16




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##### Table of Contents



Licensing
 in
vivo in situ in vitro
   Product development
     17




---



##### Table of Contents



Chlamydia trachomatis
  Revenues
  Product sales
   18




---



##### Table of Contents



Collaborative research revenue
   Royalty and license revenue
   Cost of product sales
    19




---



##### Table of Contents



Research and development
    Critical Accounting Policies and Estimates
   Stock-based compensation expense
  20




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##### Table of Contents



Results of Operations
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    

$ Change
    
    
    % Change
    
    
    2006
    
    
    2005
    
    

$ Change
    
    
    % Change(in millions, except per share data)Statements of income:Revenues:Product sales
    
    $
    83.5
    
    
    $
    69.0
    
    
    $
    14.5
    
    
    
    21
    %
    
    $
    239.8
    
    
    $
    193.6
    
    
    $
    46.2
    
    
    
    24
    %Collaborative research revenue
    
    
    1.5
    
    
    
    6.3
    
    
    
    (4.8
    )
    
    
    (76
    )%
    
    
    14.7
    
    
    
    19.4
    
    
    
    (4.7
    )
    
    
    (24
    )%Royalty and license revenue
    
    
    7.3
    
    
    
    1.0
    
    
    
    6.3
    
    
    
    630
    %
    
    
    9.2
    
    
    
    5.0
    
    
    
    4.2
    
    
    
    84
    %Total revenues
    
    
    92.3
    
    
    
    76.3
    
    
    
    16.0
    
    
    
    21
    %
    
    
    263.7
    
    
    
    218.0
    
    
    
    45.7
    
    
    
    21
    %Operating expenses:Cost of product sales
    
    
    23.8
    
    
    
    21.4
    
    
    
    2.4
    
    
    
    11
    %
    
    
    74.7
    
    
    
    57.2
    
    
    
    17.5
    
    
    
    31
    %Research and development
    
    
    24.2
    
    
    
    17.5
    
    
    
    6.7
    
    
    
    38
    %
    
    
    63.8
    
    
    
    53.6
    
    
    
    10.2
    
    
    
    19
    %Marketing and sales
    
    
    9.5
    
    
    
    7.6
    
    
    
    1.9
    
    
    
    25
    %
    
    
    27.6
    
    
    
    22.4
    
    
    
    5.2
    
    
    
    23
    %General and administrative
    
    
    12.8
    
    
    
    7.8
    
    
    
    5.0
    
    
    
    64
    %
    
    
    34.1
    
    
    
    22.8
    
    
    
    11.3
    
    
    
    50
    %Total operating expenses
    
    
    70.3
    
    
    
    54.3
    
    
    
    16.0
    
    
    
    29
    %
    
    
    200.2
    
    
    
    156.0
    
    
    
    44.2
    
    
    
    28
    %Income from operations
    
    
    22.0
    
    
    
    22.0
    
    
    
    
    
    
    
    0
    %
    
    
    63.5
    
    
    
    62.0
    
    
    
    1.5
    
    
    
    2
    %Total other income, net
    
    
    1.9
    
    
    
    1.3
    
    
    
    0.6
    
    
    
    46
    %
    
    
    5.1
    
    
    
    3.4
    
    
    
    1.7
    
    
    
    50
    %Income tax expense
    
    
    8.8
    
    
    
    6.9
    
    
    
    1.9
    
    
    
    28
    %
    
    
    25.3
    
    
    
    22.1
    
    
    
    3.2
    
    
    
    14
    %Net income
    
    $
    15.1
    
    
    $
    16.4
    
    
    $
    (1.3
    )
    
    
    (8
    )%
    
    $
    43.3
    
    
    $
    43.3
    
    
    $
    
    
    
    
    
    %Net income per shareBasic
    
    $
    0.29
    
    
    $
    0.32
    
    
    $
    (0.03
    )
    
    
    (9
    )%
    
    $
    0.84
    
    
    $
    0.86
    
    
    $
    (0.02
    )
    
    
    (2
    )%Diluted
    
    $
    0.28
    
    
    $
    0.31
    
    
    $
    (0.03
    )
    
    
    (10
    )%
    
    $
    0.82
    
    
    $
    0.83
    
    
    $
    (0.01
    )
    
    
    (1
    )%Weighted average shares outstandingBasic
    
    
    51.6
    
    
    
    50.7
    
    
    
    
    
    
    
    
    
    
    
    51.4
    
    
    
    50.5Diluted
    
    
    53.2
    
    
    
    52.5
    
    
    
    
    
    
    
    
    
    
    
    53.0
    
    
    
    52.4
  21




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Product sales
    Collaborative research revenue
    22




---



##### Table of Contents



Royalty and license revenue
    Cost of product sales
       23




---



##### Table of Contents



Research and development
   Marketing and sales
   General and administrative
   Total other income, net
  Income tax expense
  24




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##### Table of Contents



Liquidity and Capital Resources
 September 30,
    
    
    December 31,2006
    
    
    2005Cash, cash equivalents and short-term investments
    
    $
    271,520
    
    
    $
    220,288Working capital
    
    $
    323,870
    
    
    $
    262,659Current ratio
    
    
    8:1
    
    
    
    6:1
 Nine Months EndedSeptember 30,2006
    
    
    2005
    
    

$ ChangeCash provided by (used in):Operating activities
    
    $
    72,041
    
    
    $
    68,181
    
    
    $
    3,860Investing activities
    
    
    (70,109
    )
    
    
    (61,683
    )
    
    
    (8,426
    )Financing activities
    
    
    27,321
    
    
    
    13,963
    
    
    
    13,358Purchases of property, plant and equipment (included in investing activities above)
    
    $
    (40,126
    )
    
    $
    (29,894
    )
    
    $
    (10,232
    )
      25




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##### Table of Contents



Contractual Obligations and Commercial Commitments
  Total
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterOperating leases (1)
    
    $
    1,383
    
    
    $
    283
    
    
    $
    863
    
    
    $
    167
    
    
    $
    70
    
    
    $
    Material purchase commitments (2)
    
    
    11,699
    
    
    
    5,803
    
    
    
    5,896
    
    
    
    
    
    
    
    
    
    
    
    Collaborative commitments (3)
    
    
    17,869
    
    
    
    3,269
    
    
    
    3,050
    
    
    
    10,400
    
    
    
    1,150
    
    
    
    Total (4)
    
    $
    30,951
    
    
    $
    9,355
    
    
    $
    9,809
    
    
    $
    10,567
    
    
    $
    1,220
    
    
    $
    
 
 (1)
    
    Reflects obligations on facilities under operating leases in place as of September 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 $10.5 million expected to be
purchased for TIGRIS instruments in 2006 and 2007, we anticipate that approximately $5.9
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.     26




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##### Table of Contents



Stock Options
 Option program description
  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
    
    
    
    Additional Authorized
    
    
    3,000
    *
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Grants
    
    
    (1,709
    )
    
    
    1,421
    
    
    
    50.20
    
    
    
    143
    **
    
    
    2Exercises
    
    
    
    
    
    
    (760
    )
    
    
    22.85
    
    
    
    
    
    
    
    (2
    )Cancellations
    
    
    200
    ***
    
    
    (182
    )
    
    
    39.69
    
    
    
    (12
    )
    
    
    September 30, 2006
    
    
    2,431
    
    
    
    6,433
    
    
    $
    34.60
    
    
    
    303
    ****
    
    
    
 
 *
    
    In May 2006, the Companys stockholders approved an amendment and restatement of 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 142,800, however, pursuant to the terms of the
2003 Plan, as amended, the number of shares reserved for issuance has been reduced by 285,600,
reflecting a reduction of 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 cancellation of 6,000 restricted shares that were granted after May 17, 2006,
reflecting two shares for each restricted share canceled.****
    
    Includes 80,000 shares of Deferred Issuance Restricted Stock and approximately 222,500 shares
of Restricted Stock as of September 30, 2006. In-the-Money and Out-of-the-Money Option Information
 Exercisable
    
    
    Unexercisable
    
    
    TotalWeighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseAs of September 30, 2006
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceIn-the-money
    
    
    2,981
    
    
    $
    24.17
    
    
    
    1,846
    
    
    $
    38.01
    
    
    
    4,827
    
    
    $
    29.39Out-of-the money(1)
    
    
    89
    
    
    
    49.80
    
    
    
    1,517
    
    
    
    50.04
    
    
    
    1,606
    
    
    
    50.03Total options outstanding
    
    
    3,070
    
    
    
    
    
    
    
    3,363
    
    
    
    
    
    
    
    6,433
 
 (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, $46.89, at the close of business on September 30,
2006. 27




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Available Information
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Foreign currency exchange risk
   
 Item 4. Controls and Procedures
    28




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##### 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.*
  29




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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.*
   30




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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.*
     31




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##### 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.
     32




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##### Table of Contents



Our gross profit margin percentage on the sale of blood screening assays will decrease upon the
implementation of individual donor testing.
  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.*
    33




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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.
  34




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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.*
  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.
  35




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##### Table of Contents



We expect to continue to incur significant research and development expenses, which may make it
difficult for us to maintain profitability.
  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.
    36




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##### Table of Contents



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.
     Our products are subject to recalls even after receiving FDA approval or clearance.
  Our sales to international markets are subject to additional risks.*
  37




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##### Table of Contents




    
    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.
    38




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##### Table of Contents



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.
  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.
  39




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##### 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.
   40




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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.
  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.*
  41




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##### Table of Contents



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.
  Compliance with changing corporate governance and public disclosure regulations may result in additional expenses.
  42




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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, 2003.4.5
    
    Third Amendment to Rights Agreement, dated October 3, 2006.10.96*
    
    Settlement Agreement dated August 1, 2006 by and among Gen-Probe Incorporated, Bayer HealthCare LLC and
Bayer Corporation.31.1
    
    Certification dated November 1, 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 November 1, 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 November 1, 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 November 1, 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.*
    
    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. 43




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##### Table of Contents



SIGNATURES
  DATE: November 1, 2006
    
    By:
    
    /s/ Henry L. NordhoffHenry L. NordhoffChairman, President and Chief Executive Officer(Principal Executive Officer)DATE: November 1, 2006
    
    By:
    
    /s/ Herm RosenmanHerm RosenmanVice President  Finance and Chief FinancialOfficer (Principal Financial Officer andPrincipal Accounting Officer)
 44