Stock Repurchase Program
In August 2008, our Board of Directors authorized the repurchase of up to $250.0 million of our common stock over the two years following adoption of the program, through negotiated or open market transactions. There is no minimum or maximum number of shares to be repurchased under the program. During the third quarter of 2008, we repurchased and retired approximately 180,000 shares under this program for $10.0 million.
Voluntary Counterbid to Acquire Innogenetics In June 2008, following a bid by Solvay Pharmaceuticals, we launched a conditional counterbid to acquire 100% of the outstanding shares, warrants and convertible bonds of Innogenetics NV, a Belgian molecular diagnostics company, for approximately €215 million. On July 9, 2008, Solvay Pharmaceuticals submitted a higher bid to acquire Innogenetics and we formally withdrew our counterbid. Included in our general and administrative expenses for the first nine months of 2008 are approximately $2.0 million of costs associated with our counterbid to acquire Innogenetics.
Corporate Collaborations
In June 2008, 3M Corporation, or 3M, discontinued our collaboration to develop rapid, molecular tests for healthcare-associated infections, or HCAIs, due to technical incompatibilities between our NAT technologies and 3M's proprietary microfluidics instrument platform. Under the terms of the discontinued agreement, we were responsible for assay development, which 3M funded. 3M also agreed to pay us milestones based on technical and commercial progress. We earned the first of these milestones, related to assay feasibility, in the fourth quarter of 2007. Based on the termination of the agreement, in June 2008 we recorded $2.7 million in collaborative research revenue that was previously deferred. The agreement requires 3M to pay us costs incurred to wind down the collaboration, which we anticipate we will receive in the fourth quarter of 2008.
In January 2008, Millipore Corporation commenced commercialization of the first MilliPROBE assay, developed under our industrial testing collaboration, which targets the bacterium Pseudomonas aeruginosa and is designed as an in-process, early warning system to provide faster, more effective detection of Pseudomonas aeruginosa in purified water used during drug production. The assay was designed to ensure a higher degree of water quality throughout manufacturing processes where the contaminant can be a serious quality and safety concern. We believe faster detection will enable biopharmaceutical manufacturers to reduce downstream processing risks, optimize product yields and improve final product quality.
Product Development
In August 2008, the Food and Drug Administration, or FDA, approved our triplex assay, Procleix Ultrio, to screen donated blood, plasma, organs and tissues for HBV in individual blood donations or in pools of up to 16 blood samples on the enhanced semi-automated system, or eSAS, and on the fully automated, high-throughput TIGRIS system. The FDA had previously approved the assay to screen donated blood for HIV-1 and HCV.
In May 2008, we launched in Europe our APTIMA HPV assay, a highly specific molecular diagnostic test to detect high-risk strains of HPV, which are associated with cervical cancer. The APTIMA HPV assay has been CE-marked for use on the fully automated, high-throughput TIGRIS system and our semi-automated Direct Tube Sampling, or DTS, system, and is currently available for sale in 13 European Union countries.
In March 2008, we started U.S. clinical trials for our investigational APTIMA HPV assay. The investigational APTIMA HPV assay is an amplified nucleic acid test that detects 14 high-risk HPV types that are associated with cervical cancer. More specifically, the assay detects two messenger RNAs, or mRNAs, that are made in higher amounts when HPV infections progress toward cervical cancer. We believe that targeting these mRNAs may more accurately identify women at higher risk of having, or developing, cervical cancer than competing assays that target HPV DNA. We expect to enroll approximately 7,000 women in the trial. Actual enrollment, however, may vary based on the prevalence of cervical disease among women in the trial. The trial enrollment and testing are expected to take approximately two years. The APTIMA HPV assay is designed to run on our fully automated, high-throughput TIGRIS instrument system, and on our future medium-throughput instrument platforms.

Final Payment Received in Litigation Settlement In June 2006, we entered into a Short Form Settlement Agreement with Bayer HealthCare LLC and Bayer Corp., collectively Bayer, to resolve patent litigation we filed against Bayer in the United States District Court for the Southern District of California and to resolve separate commercial arbitration proceedings between the parties. On August 1, 2006, the parties signed final, definitive settlement documentation, referred to herein as the Settlement Agreement. All litigation and arbitration proceedings between us and Bayer were terminated pursuant to the Settlement Agreement.
Pursuant to the Settlement Agreement, Bayer paid us an initial license fee of $5.0 million in August 2006. Siemens, as assignee of Bayer, paid us $10.3 million as a one-time royalty on January 31, 2007 and $16.4 million as a one-time royalty on January 31, 2008. As a result of these royalty payments, Siemens' rights to the patents subject to the Settlement Agreement are fully paid-up and royalty free.
Pursuant to the Settlement Agreement, we obtained certain contract and patent rights to distribute qualitative HIV-1 and HCV tests through October 2010. We also obtained an option to extend our rights through the life of certain HIV-1 and HCV patents. The option also permits us to elect to extend our rights to future instrument systems (but not to the TIGRIS instrument). We are required to exercise the option prior to the expiration of the existing rights in October 2010 and, if exercised, pay a $1.0 million fee. Critical accounting policies and estimates Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, the collectibility of accounts receivable, valuation of inventories, long-lived assets, including license and manufacturing access fees, patent costs and capitalized software, income tax and valuation of stock-based compensation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, which form the basis for making judgments about the carrying values of assets and liabilities. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual results may differ from these estimates.
We believe there have been no significant changes during the first nine months of 2008 to the items that we disclosed as our critical accounting policies and estimates in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2007, except for the items discussed below.
Adoption of recent accounting pronouncements
SFAS No. 157
Effective January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157, "Fair Value Measurements," or SFAS No. 157, for financial assets and liabilities measured at fair value. SFAS No. 157 defines fair value, expands disclosure requirements around fair value and specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs create the following fair value hierarchy:
• Level 1 - Quoted prices for identical instruments in active markets.

• Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

• Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Following is a description of our valuation methodologies used for instruments measured at fair value. Where appropriate, the description includes details of the valuation models, the key inputs to those models, as well as any significant assumptions.
Available-for-sale securities
Our available-for-sale securities are comprised of tax advantaged municipal securities and money market funds. When available, we generally use quoted market prices to determine fair value, and classify such items in Level 1. If quoted market prices are not available, prices are determined using prices for recently traded financial instruments with similar underlying terms as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals. We classify such items in Level 2. For the quarter ended September 30, 2008, based on current market conditions and evolving interpretation of SFAS No. 157, we determined that municipal securities previously classified as Level 1, should be classified as Level 2. Because Level 1 inputs are those that have identical securities traded on an active market, and these individual securities have varying maturities and are more comparable to similar securities traded on a market that is not active, we determined that a Level 2 classification is more appropriate. The change in classification in no way indicates a decrease in the underlying value of the assets. In addition, money market funds were added to the table with Level 1 or Level 2 classification based on the availability of quoted market prices. At September 30, 2008, we reported $6.9 million and $495.8 million of assets measured at fair value on a recurring basis in Level 1 and 2, respectively.
Equity investment in private company
In 2006, we invested in Qualigen, Inc., or Qualigen, a private company. The valuation of investments in non-public companies requires significant management judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such assets. Our equity investments in private companies are valued initially based upon the transaction price under the cost method of accounting. Such instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). At September 30, 2008, we reported $5.4 million of assets measured at fair value on a non-recurring basis in Level 3 of the fair value hierarchy.
We record impairment charges when we believe an investment has experienced a decline that is other-than-temporary. The determination that a decline is other-than-temporary is, in part, subjective and influenced by many factors. Future adverse changes in market conditions or poor operating results of investees could result in losses or an inability to recover the carrying value of the investments, thereby possibly requiring impairment charges in the future. When assessing investments in private companies for an other-than-temporary decline in value, we consider such factors as, among other things, the share price from the investee's latest financing round, the performance of the investee in relation to its own operating targets and its business plan, the investee's revenue and cost trends, the investee's liquidity and cash position, including its cash burn rate, and market acceptance of the investee's products and services. From time to time, we may consider third party evaluations or valuation reports. We also consider new products and/or services that the investee may have forthcoming, any significant news specific to the investee, the investee's competitors and/or industry and the outlook of the overall industry in which the investee operates. In the event our judgments change as to other-than temporary declines in value, we may record an impairment loss, which could have an adverse impact on our results of operations. During the quarter ended September 30, 2008, we recorded $1.6 million in other-than-temporary losses on our investment in Qualigen. This amount is included in other income/(expense) on the consolidated statements of income.
SFAS No. 159
Effective January 1, 2008, we adopted SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115," or SFAS No. 159, which expands the use of fair value accounting but does not affect existing standards that require assets or liabilities to be carried at fair value. Under SFAS No. 159, a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instruments that otherwise would not be

recognized at inception and non-cash warranty obligations where a warrantor is permitted to pay a third party to provide the warranty goods or services. If the use of fair value is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred (e.g., debt issue costs). The fair value election is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. Subsequent to the adoption of SFAS No. 159, changes in fair value are recognized in earnings. During the first nine months of 2008, we did not elect fair value as an alternative measurement for any financial instruments not previously carried at fair value.
EITF Issue No. 07-3
Effective January 1, 2008, we adopted Emerging Issues Task Force Issue No. 07-3, "Accounting for Non-Refundable Payments for Goods or Services Received for Use in Future Research and Development Activities," or EITF Issue No. 07-3. EITF Issue No. 07-3 requires that non-refundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed. There was no material financial statement impact as a result of adoption.

Results of Operations

(Dollars in millions)                        Three Months Ended September 30,                            Nine Months Ended September 30,
                                       2008            2007       $ Change       % Change          2008           2007       $ Change       % Change
Product Sales                    $    108.3       $    97.4     $     10.9             11 %   $   323.5       $  278.5     $     45.0             16 %

As a percent of total revenues           89 %            96 %                                        89 %           91 %

Our primary source of revenue comes from product sales, which consist primarily of the sale of clinical diagnostic and blood screening products in the United States. Our clinical diagnostic products include our APTIMA, PACE, AccuProbe and Amplified Mycobacterium Tuberculosis Direct Test product lines. The principal customers for our clinical diagnostics products include large reference laboratories, public health institutions and hospitals. The blood screening assays and instruments we manufacture are marketed worldwide through our collaboration with Novartis under the Procleix and Ultrio trademarks.
We recognize product sales from the manufacture and shipment of tests for screening donated blood at the contractual transfer prices specified in our collaboration agreement with Novartis for sales to end-user blood bank facilities located in countries where our products have obtained governmental approvals. Blood screening product sales are then adjusted monthly corresponding to Novartis' payment to us of amounts reflecting our ultimate share of net revenue from sales by Novartis to the end user, less the transfer price revenues previously recorded. Net sales are ultimately equal to the sales of the assays by Novartis to third parties, less freight, duty and certain other adjustments specified in our collaboration agreement with Novartis multiplied by our share of the net revenue.
Product sales increased 11% in the third quarter of 2008 compared to the same period of the prior year. The $10.9 million increase was primarily attributed to $7.2 million in higher APTIMA assay sales and $6.6 million in higher blood screening assay sales, partially offset by a $2.3 million decrease in instrumentation sales and a $1.3 million decrease in PACE product sales.
Diagnostic product sales, including assay, instrument, and ancillary sales, represented $55.6 million, or 51% of product sales, in the third quarter of 2008, compared to $51.8 million, or 53% of product sales in the third quarter of 2007. This $3.8 million increase was primarily driven by volume gains in our APTIMA product line as the result of PACE conversions, market share gains we attribute to the superior clinical performance of our assay and the availability of our fully automated TIGRIS instrument. Overall APTIMA growth was partially offset by a $1.3 million decrease in our PACE product as customers continue to convert to the more sensitive amplified APTIMA product line. In general, the price of our amplified APTIMA test is twice that of our non-amplified PACE product, thus the conversion from PACE to APTIMA drives an overall increase in product sales even if underlying testing volumes remain the same.

Blood screening related sales, including assay, instrument, and ancillary sales, represented $52.7 million, or 49% of product sales in the third quarter of 2008, compared to $45.6 million, or 47% of product sales in the third quarter of 2007. This $7.1 million increase was principally attributed to the March 2007 approval and commercial pricing of our WNV assay for use on the TIGRIS instrument, as well as international expansion of Procleix Ultrio sales by Novartis. In addition, we estimate that $1.8 million of the growth in the third quarter of 2008 over the third quarter of 2007 was related to foreign currency gains associated with favorable exchange rates on revenues collected under our collaboration with Novartis. Novartis is responsible for the billing and collection of revenues under our collaboration and many of the customer contracts and billings are accounted for in local currencies, primarily the Euro. Novartis translates these revenues into U.S. dollars and submits them to us in U.S. dollars, thus creating the favorable impact. Our share of blood screening revenues is based upon sales of assays by Novartis, on blood donation levels and the related price per donation. In the third quarter of 2008, United States blood donation volumes screened using the Procleix blood screening family of assays were relatively consistent with 2007 levels, as was the related pricing.
Product sales increased 16% in the first nine months of 2008 compared to the same period of the prior year. The $45.0 million increase was primarily attributed to $25.9 million in higher blood screening assay sales and $20.9 million in higher APTIMA assay sales, partially offset by a $4.7 million decrease in PACE product sales as customers continue to convert to the more sensitive amplified APTIMA product line.
Diagnostic product sales, including assay, instrument, and ancillary sales, represented $165.3 million, or 51% of product sales, in the first nine months of 2008, compared to $149.5 million, or 54% of product sales in the first nine months of 2007. This $15.8 million increase was primarily driven by volume gains in our APTIMA product line as the result of PACE conversions, market share gains we attribute to the superior clinical performance of our assay and the availability of our fully automated TIGRIS instrument. Overall APTIMA growth was partially offset by a $4.7 million decrease in our PACE product as customers continue to convert to the more sensitive amplified APTIMA product line. In the first nine months of 2008, APTIMA sales were approximately 87% of our STD product sales versus PACE sales of 13%. In the first nine months of 2007, APTIMA represented 81% of STD product sales, and PACE 19%. Average pricing in the first nine months of 2008 related to our APTIMA products decreased approximately 5% from the first nine months of 2007 primarily related to strong unit growth in our corporate account sector.
Blood screening related sales, including assay, instrument, and ancillary sales, represented $158.2 million, or 49% of product sales, in the first nine months of 2008, compared to $129.0 million, or 46% of product sales in the first nine months of 2007. This $29.2 million increase was principally attributed to the March 2007 approval and commercial pricing of our WNV assay for use on the TIGRIS instrument, as well as international expansion of Procleix Ultrio sales by Novartis. In the first nine months of 2008, United States blood donation volumes screened using the Procleix blood screening family of assays were relatively consistent with 2007 levels, as was the related pricing. International revenues increased as the Procleix Ultrio product further penetrated international markets. Included in the blood screening results for the first nine months of 2008 was a one-time $2.6 million benefit related to an adjustment to service costs previously deducted by Novartis prior to arriving at our net share of revenue under the collaboration. In addition, we estimate that $5.2 million of the growth in the first nine months of 2008 over the first nine months of 2007 was related to foreign currency gains associated with favorable exchange rates on revenues collected under our collaboration with Novartis.

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