Recent Events
Financial Results
Product sales for the first quarter of 2009 were $112.5 million, compared to $101.5 million in the same period of the prior year, an increase of 11%. Total revenues for the first quarter of 2009 were $116.2 million, compared to $122.6 million in the same period of the prior year, a decrease of 5%. Net income for the first quarter of 2009 was $25.7 million ($0.48 per diluted share), compared to $31.9 million ($0.58 per diluted share) in the same period of the prior year, a decrease of 19%. Total revenues and net income declined in the first quarter of 2009 due to non-recurring royalty and license revenue recorded in the prior year period. Specifically, we received $16.4 million of revenue from Bayer Corporation, or Bayer, in the first quarter of 2008 representing the third and final payment due to us in connection with the settlement of the companies' patent infringement litigation.
Acquisition of Tepnel Life Sciences plc In April 2009, we completed the acquisition of Tepnel Life Sciences plc, or Tepnel, a company registered in England and Wales, for approximately $137.1 million (based on the then applicable exchange rate). We believe the acquisition of Tepnel will provide us access to growth opportunities in transplant diagnostics, genetic testing and pharmaceutical services, as well as accelerate our ongoing strategic efforts to strengthen our marketing and sales, distribution and manufacturing capabilities in the European molecular diagnostics market.
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. As of March 31, 2009, we have repurchased and retired approximately 2,580,000 shares under this program at an average price of $42.86, or approximately $110.6 million in total.
Corporate Collaboration with Novartis In January 2009, we entered into an agreement, referred to herein as Amendment No. 11, with Novartis to amend the June 11, 1998 collaboration agreement, or the 1998 Agreement, between the parties. The effective date of Amendment No. 11 is January 1, 2009. Amendment No. 11 extends to June 30, 2025 the term of our blood screening collaboration with Novartis under the 1998 Agreement. The 1998 Agreement was scheduled to expire by its terms in 2013.
The 1998 Agreement provided that we were solely responsible for manufacturing costs incurred in connection with the collaboration, while Novartis was responsible for sales and marketing expenses associated with the collaboration. Amendment No. 11 provides that, effective January 1, 2009, we will recover 50% of our costs of goods sold incurred in connection with the collaboration. In addition, we will receive a percentage of the blood screening assay revenue generated under the collaboration, as described below.
The 1998 Agreement provided that we share revenue from the sale of blood screening assays under the collaboration with Novartis. Under the terms of the 1998 Agreement, as previously amended, our share of revenue from any assay that included a test for HCV was 45.75%. Amendment No. 11 modifies our share of such revenues, initially reducing it to 44% in 2009. Our share of blood screening assay revenue increases in subsequent years as follows: 2010-2011, 46%; 2012-2013, 47%; 2014, 48%; and 2015, 50%. Our share of blood screening assay revenue is fixed at 50% from January 1, 2015 though the remainder of the amended term of the agreement. Under Amendment No. 11, our share of blood screening assay revenue from any assay that does not test for HCV remains at 50%. Amendment No. 11 also provides that Novartis will reduce the amount of time between product sales and payment of our share of blood screening assay revenue from 45 days to 30 days. This reduction in reporting time allowed us to eliminate one month of the reporting lag for net revenues resulting in an $8.2 million one-time benefit in the first quarter of 2009.
As part of Amendment No. 11, Novartis has agreed to provide certain funding to customize our Panther instrument, a fully automated molecular testing platform now in development, for use in the blood screening market. Novartis has also agreed to pay us a milestone payment upon the first commercial sale of the Panther instrument. The parties will equally share any profit attributable to Novartis' sale or lease of Panther instruments under the collaboration. The parties have also agreed to evaluate, using our technologies, the development of companion diagnostics for current or future Novartis medicines. Novartis has agreed to provide us with certain funding in support of initial research and development.

Credit Agreement
In February 2009, we entered into a credit agreement with Bank of America, N.A., or Bank of America, which provided for a one-year senior secured revolving credit facility in an amount of up to $180.0 million that is subject to a borrowing base formula. The revolving credit facility has a sub-limit for the issuance of letters of credit in a face amount of up to $10.0 million. Advances under the revolving credit facility are intended to be used to consummate our acquisition of Tepnel and for other general corporate purposes. In March 2009, we borrowed $170.0 million under the revolving credit facility and used approximately $137.1 million to fund our acquisition of Tepnel in April 2009. At our option, loans accrue interest at a per annum rate based on, either: the base rate (the base rate is defined as the greatest of (i) the federal funds rate plus a margin equal to 0.50%, (ii) Bank of America's prime rate and (iii) LIBOR plus a margin equal to 1.00%); or LIBOR plus a margin equal to 0.60%, in each case for interest periods of 1, 2, 3 or 6 months as selected by us. In connection with the credit agreement, we also entered into a security agreement, pursuant to which we secured our obligations under the credit agreement with a first priority security interest in the securities, cash and other investment property held in specified accounts maintained by Merrill Lynch, Pierce, Fenner & Smith Incorporated, an affiliate of Bank of America.
In March 2009, we and Bank of America amended the credit agreement to increase the amount which we may borrow from time to time under the credit agreement from $180.0 million to $250.0 million. In April 2009, we borrowed an additional $70.0 million under the revolving credit facility bringing the total principal amount outstanding under the credit facility to $240.0 million.
In connection with the execution of the credit agreement with Bank of America, we terminated the commitments under our unsecured bank line of credit with Wells Fargo Bank, N.A., effective as of February 27, 2009. There were no amounts outstanding under the Wells line of credit as of the termination date. 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 the related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, the collectability of accounts receivable, and the valuation of the following: stock-based compensation, marketable securities, equity investments in privately held companies, income tax, liabilities associated with employee benefit costs, inventories, goodwill and long-lived assets, including patent costs, capitalized software and licenses and manufacturing access fees. 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 quarter of 2009 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, 2008, except for the items discussed below.
Marketable securities
The primary objectives for our marketable security investment portfolio are liquidity and safety of principal. Investments are made with the objective of achieving the highest rate of return consistent with these two objectives. Our investment policy limits investments to certain types of debt and money market instruments issued by institutions primarily with investment grade credit ratings and places restrictions on maturities and concentration by type and issuer.
We periodically review our available-for-sale securities for other than temporary declines in fair value below the cost basis and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When assessing marketable securities for other-than-temporary declines in value, we consider factors including: the significance of the decline in value compared to the cost basis, the underlying factors contributing to a decline in the prices of securities in a single asset class, how long the market value of the investment has been less than its cost basis, any market conditions that impact liquidity, the views of external investment managers, any news or financial information that has been released specific to the investee and the outlook for the overall industry in which the investee operates.
We do not consider our investments in municipal securities with a current unrealized loss position to be other-than-temporarily impaired at March 31, 2009 since we do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost. However, those investments with a contractual maturity of greater than 12 months and that are in an unrealized loss position deemed to be temporary at March 31, 2009 have been classified as non-current marketable securities.

Adoption of recent accounting pronouncements EITF Issue No. 07-1
Effective January 1, 2009, we adopted Emerging Issues Task Force, or EITF, Issue No. 07-1, "Accounting for Collaborative Agreements Related to the Development and Commercialization of Intellectual Property." EITF Issue No. 07-1 defines collaborative agreements as a contractual arrangement in which the parties are active participants to the arrangement and are exposed to the significant risks and rewards that are dependent on the ultimate commercial success of the endeavor. Additionally, it requires that revenue generated and costs incurred on sales to third parties as it relates to a collaborative agreement be recognized as gross or net based on EITF Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent." Essentially, this requires the party that is identified as the principal participant in a transaction to record the transaction on a gross basis in its financial statements. It also requires payments between participants to be accounted for in accordance with already existing generally accepted accounting principles, unless none exist, in which case a reasonable, rational, consistent method should be used. The adoption did not have a material impact on our financial statements, as all agreements were in compliance with this standard prior to adoption.
SFAS No. 141(R)
Effective January 1, 2009, we adopted Statement of Financial Accounting Standards, or SFAS, No. 141(R), "Business Combinations." SFAS No. 141(R) changes the requirements for an acquirer's recognition and measurement of the assets acquired and liabilities assumed in a business combination, including the treatment of contingent consideration, pre-acquisition contingencies, transaction costs, in-process research and development and restructuring costs. In addition, under SFAS No. 141(R), changes in an acquired entity's deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. We are currently evaluating the impact of this statement on future operations, changes in estimates and unrecognized tax benefits and liabilities as a result of recent business combination transactions.
SFAS No. 160
Effective January 1, 2009, we adopted SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements (an amendment of Accounting Research Bulletin No. 51)." SFAS No. 160 requires that noncontrolling (minority) interests be reported as a component of equity, that net income attributable to the parent and to the non-controlling interest be separately identified in the income statement, that changes in a parent's ownership interest while the parent retains its controlling interest be accounted for as equity transactions, and that any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value. As of March 31, 2009, we do not have any consolidated subsidiaries in which there is a noncontrolling interest, and therefore adoption of this statement did not have an impact on our consolidated financial statements.
SFAS No. 161
Effective January 1, 2009, we adopted SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133." SFAS No. 161 requires enhanced disclosures regarding derivatives and hedging activities, including: (a) the manner in which an entity uses derivative instruments; (b) the manner in which derivative instruments and related hedged items are accounted for under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities;" and (c) the effect of derivative instruments and related hedged items on an entity's financial position, financial performance, and cash flows. As this statement relates specifically to disclosures, there was no impact on our consolidated financial statements as a result of adoption.

Results of Operations

     (Dollars in millions)                       Three Months Ended March 31,
                                           2009        2008       $ Change       % Change
     Product Sales                    $   112.5     $ 101.5     $     11.0             11 %

     As a percent of total revenues          97 %        83 %

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 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 first quarter of 2009, compared to the same period of the prior year. The $11.0 million increase was primarily attributed to:
• an increase of $7.4 million due to higher APTIMA assay sales, and

• an increase of $7.1 million due to higher blood screening assay sales, partially offset by

• a decrease of $2.8 million in instrumentation sales, and

• a decrease of $1.5 million in PACE product sales.

Diagnostic product sales, including assay, instrument, and ancillary sales, represented $59.6 million, or 53% of product sales, in the first quarter of 2009, compared to $52.5 million, or 52% of product sales, in the first quarter of 2008, an increase of 14%. This $7.1 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 assays; and the availability of our fully automated TIGRIS instrument. Overall APTIMA growth was partially offset by a $1.5 million decrease in our PACE product sales 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. Diagnostic product sales were negatively impacted by $1.4 million in unfavorable foreign exchange rate impacts due to a stronger United States dollar in the first quarter of 2009.
Blood screening related sales, including assay, instrument, and ancillary sales, represented $52.9 million, or 47% of product sales, in the first quarter of 2009, compared to $49.0 million, or 48% of product sales, in the first quarter of 2008, an increase of 8%. This $3.9 million increase was principally attributed to a one-time favorable impact of approximately $8.2 million based upon the amended terms of our collaboration agreement with Novartis, which allowed us to recognize an additional month of our share of net blood screening donation revenues. Growth in blood screening was negatively impacted by $2.9 million in unfavorable foreign exchange rate impacts due to a stronger United States dollar, a decrease of $2.8 million in instrumentation sales, and a decrease of $0.4 million in sales of instrument ancillaries. Our share of blood screening revenues is based upon sales of assays by Novartis, on blood donation levels and the related price per donation.

     (Dollars in millions)                      Three Months Ended March 31,
                                         2009         2008       $ Change      % Change
     Collaborative Research Revenue   $   1.7       $  2.5     $     (0.8 )         (32 )%

     As a percent of total revenues         1 %          2 %

We recognize collaborative research revenue over the term of various collaboration agreements, as negotiated monthly contracted amounts are earned, in relative proportion to the performance required under the contracts, or as reimbursable costs are incurred related to those agreements. Non-refundable license fees are recognized over the related performance period or at the time that we have satisfied all performance obligations. Milestone payments are recognized as revenue upon the achievement of specified milestones. In addition, we record as collaborative research revenue shipments of blood screening products in the United States and other countries in which the products have not received regulatory approval. This is done because restrictions apply to these products prior to FDA marketing approval in the United States and similar approvals in foreign countries.
The costs associated with collaborative research revenue are based on fully burdened full time equivalent rates and are reflected in our consolidated statements of income under the captions "Research and development," "Marketing and sales" and "General and administrative," based on the nature of the costs. We do not separately track all of the costs applicable to collaborations and, therefore, are not able to quantify all of the direct costs associated with collaborative research revenue.
Collaborative research revenue decreased 32% in the first quarter of 2009, compared to the same period of the prior year. The $0.8 million decrease was primarily due to:
• a decrease of $0.8 million in reimbursement from 3M Corporation, or 3M, related to our healthcare-associated infection collaboration which was discontinued in June 2008, and

• a net decrease of $0.2 million in reimbursement from Novartis for shared development expenses, comprised of $1.1 million in lower billings related to the development of the Procleix Ultrio assay, partially offset by the recognition of $0.5 million in previously deferred revenue for Novartis projects and $0.3 million in increased billings related to new projects for Dengue, the Panther instrument and software development, partially offset by

• an increase of $0.3 million of funded development for products associated with our collaboration with Millipore.

Collaborative research revenue tends to fluctuate based on the amount of research services performed, the status of projects under collaboration and the achievement of milestones. Due to the nature of our collaborative research revenue, results in any one period are not necessarily indicative of results to be achieved in the future. Our ability to generate additional collaborative research revenue depends, in part, on our ability to initiate and maintain relationships with potential and current collaborative partners and the advancement of related collaborative research and development. These relationships may not be established or maintained and current collaborative research revenue may decline.

      (Dollars in millions)                      Three Months Ended March 31,
                                          2009        2008       $ Change      % Change
      Royalty and License Revenue      $   2.0      $ 18.6     $    (16.6 )         (89 )%

      As a percent of total revenues         2 %        15 %

We recognize revenue for royalties due to us upon the manufacture, sale or use of our products or technologies under license agreements with third parties. For those arrangements where royalties are reasonably estimable, we recognize revenue based on estimates of royalties earned during the applicable period and adjust for differences between the estimated and actual royalties in the following period. Historically, these adjustments have not been material. For those arrangements where royalties are not reasonably estimable, we recognize revenue upon receipt of royalty statements from the applicable licensee. Non-refundable license fees are recognized over the related performance period or at the time that we have satisfied all performance obligations.
Royalty and license revenue decreased 89% in the first quarter of 2009 compared to the same period of the prior year. The $16.6 million decrease was primarily due to the $16.4 million settlement payment received from Bayer during the first quarter of 2008. Bayer has now paid all amounts due to us under our settlement agreement, and thus these payments will not recur in future periods.

Royalty and license revenue may fluctuate based on the nature of the related agreements and the timing of receipt of license fees. Results in any one period are not necessarily indicative of results to be achieved in the future. In addition, our ability to generate additional royalty and license revenue will depend, in part, on our ability to market and commercialize our technologies. We . . .