Description
Filed with the SEC from March 31 to April 06:
Celera (CRA)
Biotech-focused fund group BVF Partners noted in a filing that Quest Diagnostics (ticker: DGX) had rejected its suggestion that the $8.00-per-share price of the planned buyout of Celera by Quest be increased to account for passive drug royalties. In a prior filing, BVF warned that, if the offer price weren't raised, it would refuse to tender its shares. BVF owns 9,055,392 shares (12.0%).
BUSINESS OVERVIEW
History
Prior to July 1, 2008, we operated as a reporting unit of Applied Biosystems, Inc. (Applied Biosystems), formerly known as Applera Corporation (Applera), and not as a stand-alone company. Applied Biosystems established the following two classes of common stock, sometimes referred to as tracking stocks, which were intended to reflect separately the relative performance of Applied Biosystems’ two businesses:
•Applied Biosystems Group common stock that was intended to reflect the relative performance of the Applied Biosystems Group; and
•Celera Group common stock that was intended to reflect the relative performance of the Celera Group.
On July 1, 2008, Applied Biosystems separated the Celera Group reporting unit from Applied Biosystems’ remaining businesses by means of a redemption of each outstanding share of Celera Group common stock in exchange for one share of common stock of Celera Corporation, a newly formed Delaware corporation. Upon the separation, we held all of the businesses, assets and liabilities attributed to the Celera Group and became an independent, publicly-traded company. Our common stock began trading on The NASDAQ Stock Market on July 1, 2008 under the symbol “CRA.”
In November 2008, Applied Biosystems merged with Invitrogen Corporation to form a new company, Life Technologies Corporation (Life Technologies). The contractual and commercial relationships we had with Applied Biosystems are now held with Life Technologies, as successor to Applied Biosystems. Applied Biosystems is referred to as Life Technologies in this Annual Report on Form 10-K and our original contractual relationships with Applied Biosystems are referred to as contractual relationships with Life Technologies, its successor.
References to the “Company,” “Celera,” “we,” “us” and “our” refer to the Celera Group for all periods prior to the completion of the split-off and to Celera Corporation and its direct and indirect subsidiaries for all periods following completion of the split-off, in each case, unless the context otherwise requires.
Fiscal Year Change
In July 2008, our Board of Directors approved a change of the Company’s fiscal year from a June 30 fiscal year end to a 52 or 53 week fiscal year generally ending on the last Saturday in December.
Business Overview
We are a healthcare business focusing on the integration of genetic testing into routine clinical care through a combination of products and services incorporating proprietary discoveries. We are organized into three reporting segments, a clinical laboratory testing service business (Lab Services), a products business (Products), and a segment that includes other activities under corporate management (Corporate). Our Lab Services business, conducted through Berkeley HeartLab, Inc. (BHL), offers a broad portfolio of clinical laboratory tests and disease management services designed to help physicians improve cardiovascular disease treatment regimens for their patients. Our Products business develops, manufactures, and oversees the commercialization of molecular diagnostic products. Most of this business is conducted through distribution and royalty agreements with Abbott Molecular (Abbott), a subsidiary of Abbott Laboratories. Our Corporate segment includes revenues from royalties, licenses, collaborations and milestones related to the licensing of certain intellectual property and from our former small molecule and proteomic programs.
Since we commenced operations we have evolved from a business focused on the discovery and distribution of genomic information based on our work in sequencing the human genome to a diagnostics business focused on personalized disease management.
We conduct research to make discoveries to support the development of proprietary new products and services in our Lab Services and Products businesses and as a basis for external collaborations and licensing arrangements. We have conducted large-scale disease association studies for multiple disease conditions, including liver disease, autoimmunity, Alzheimer’s disease and cancer, but most of our discovery and development efforts are currently focused on cardiovascular disease and metabolic disorders.
Our prior proteomics research studied differences in proteins found in patients with and without cancer. While the findings of our genetic and proteomic studies can be used for both therapeutic and diagnostic purposes, currently our discovery work is being pursued internally solely for the purpose of developing new diagnostic products and services and supporting collaborations. Findings with therapeutic implications are being pursued externally by our collaborators.
In October 2007, we acquired all of the outstanding capital stock of BHL for approximately $193 million in cash, including transaction costs. BHL is a cardiovascular healthcare company that offers clinical laboratory testing services that characterize and monitor cardiovascular risk and disease management services. BHL is focused primarily on serving the secondary prevention market, that is, those patients who have been diagnosed with cardiovascular disease or lipid or metabolic disorders.
Also in October 2007, we acquired substantially all of the assets of Atria Genetics, Inc. (Atria) for approximately $33 million in cash, including transaction costs. Atria has a line of human leukocyte antigen (HLA) molecular diagnostic testing products that are used for identifying potential donors in the matching process for bone marrow transplantation.
Technical Background
Genetics and Proteomics
DNA molecules consist of chemical subunits, called nucleotides, bound in two long strands. A nucleotide is made up of a sugar molecule, a phosphate group, and one of four bases — adenine, cytosine, guanine, or thymine — often abbreviated with their first letters A, C, G, and T. In a DNA molecule, the nucleotides in the two strands are bound together in pairs to form a structure that resembles a twisted ladder or double helix. The bound pairs of nucleotides that form the rungs of the ladder are called base pairs.
Genes are segments of these DNA molecules that carry specific information necessary to perform particular biological functions, such as instructions for making proteins. Currently, scientists believe humans have approximately 21,000 genes. Genes may contain from several dozen to tens of thousands of nucleotides. The entire collection of DNA in humans, called the human genome, contains approximately 3.1 billion base pairs, approximately 2 to 3 million of which vary between two individuals. Single differences in base pairs between individuals are called single nucleotide polymorphisms, or SNPs.
Gene expression is the process by which proteins are made from the instructions encoded in DNA. Proteins are molecules composed of one or more chains of amino acids. Proteins are required for the structure, function, and regulation of the body’s cells, tissues, and organs; and each protein has unique functions.
Genetics is the study of heredity and how differences in genes relate to individual characteristics, while proteomics is the study of the set of proteins encoded by a genome. Disease association studies are research studies that compare SNPs, base insertions, base deletions, gene copy numbers, gene expression profiles, and/or proteins from biological samples obtained from people with specific known characteristics or medical conditions with samples from people without those characteristics or medical conditions. Studies for predicting treatment response are research studies that compare SNPs, base insertions, base deletions, gene copy numbers, gene expression profiles, and/or proteins from biological samples obtained from people who responded positively to a specific form of treatment with samples from people who did not respond or responded negligibly to the same treatment or who suffered toxic side effects from the treatment. Once a genetic or proteomic difference has been identified for a specific characteristic or disease or treatment response, the study is repeated, or replicated, in additional samples to confirm the initial findings. The findings are then studied using biological samples from the general population to understand how they occur in different groups in the population and to assess their potential utility for use in new diagnostic test procedures. Some findings from disease association studies and studies of treatment response may have applicability in the development of new drugs or therapeutic agents.
Molecular Diagnostics
Molecular diagnostics involves providing testing products and/or testing services to detect genetic differences between individuals relating to predisposition for disease, prediction of the rate of disease progression, optimization or selection of therapies to prevent or treat disease, and the detection, characterization and quantification of the genetic makeup of microorganisms that cause disease. Molecular diagnostic tests require highly sensitive and specific molecular testing methods. All of the products that we currently manufacture are considered molecular diagnostic products. BHL also offers molecular diagnostic testing services through its clinical laboratory.
Lipoprotein Measurement and Cardiovascular Disease
Lipoproteins are molecules containing both a lipid, or fat soluble component, and a protein. Low-density lipoprotein, or LDL, and high-density lipoprotein, or HDL, particles are present in all individuals and are distinguished by differences in size and density. Subclasses of LDL and HDL differ in their effects on the development of, or protection from, atherosclerosis, or hardening of the arteries, and risk associated with cardiovascular disease. Healthcare providers order testing of blood samples on patients with lipid or metabolic disorders or with cardiovascular disease, or suspected of being at risk for these conditions, to determine the distribution of particle size and density for both HDL and LDL as a means of characterizing the patient’s relative risk for primary or recurrent cardiovascular disease and to develop personalized treatment regimens and monitor the patient’s progress in reducing this risk. BHL offers clinical laboratory testing services that quantify five subclasses of HDL and seven subclasses of LDL particles.
Personalized Disease Management
Personalized disease management involves the use of diagnostic testing procedures and other means to assess an individual’s risk for a disease or to characterize a disease in order to recommend individualized lifestyle and therapy choices to mitigate disease development or progression, and to monitor their effectiveness.
BHL’s clinical laboratory testing business is regulated by the Centers for Medicare and Medicaid Services (CMS) through the Clinical Laboratory Improvements Amendments of 1988, or CLIA. The two dominant competitors to BHL in the general laboratory market are Laboratory Corporation of America, or LabCorp, and Quest Diagnostics Incorporated, or Quest. BHL’s main competitors in the lipid subclass analysis market, LipoScience, Inc., Atherotech, Inc. and Boston Heart Lab, provide their subclass analysis testing services directly to physicians as well as through distribution channels such as LabCorp and Quest. Other competitors to BHL in the cardiovascular disease testing and management market are Health Diagnostic Laboratory, Inc. and Cleveland HeartLab.
BHL Testing Services
BHL has a CLIA-certified laboratory that provides a broad portfolio of testing services focused on the cardiovascular disease secondary prevention market. BHL conducts its clinical laboratory testing services in a 40,000 square foot laboratory located in Alameda, California. Healthcare providers, clinical laboratories and specimen collection stations collect and send to our laboratory for testing most of the clinical laboratory specimens used in our clinical laboratory testing service business. A specimen collection station is a facility established and, where necessary, licensed for the purpose of having a phlebotomist, who is a BHL employee or contractor, collect blood specimens. Healthcare providers may refer patients to BHL’s specimen collection stations for specimen collection or collect the specimens in their own facilities. Specimens are then sent to BHL’s clinical laboratory for testing. BHL also receives specimens for genetic testing that are collected using a buccal, or cheek, swab.
BHL has an exclusive license from the Regents of the University of California through the Ernest Orlando Lawrence Berkeley National Laboratory for a patent related to segmented gradient gel electrophoresis determination of LDL subclasses. Other companies offer clinical testing services using a traditional lipid panel test, “cholesterol tests” or “advanced cholesterol tests” (tests that measure the number of lipoprotein particles in a person’s blood) and generally target the primary care/lipid screening market. However, these tests are generally not considered competitive with BHL’s testing services because: (1) they do not provide the level of discrimination and quantification of lipid subclasses for both LDL and HDL that is provided by BHL’s segmented gradient gel electrophoresis testing; and (2) healthcare providers are able to use our clinical laboratory tests to monitor therapeutic response and disease progression in their patients over time.
Principal Testing Services
Most of BHL’s testing services incorporate the use of in vitro , meaning outside of the living body, diagnostic (IVD) test products cleared or approved by the U.S. Food and Drug Administration (FDA). However, BHL’s LDL-S 3 GGE ® , HDL-S 10 GGE ® , KIF6 , LPA , ApoE, Chromosome 9p21 and Cytochrome 2C19 tests are based on internally-developed and validated laboratory-developed tests that are not required to be FDA cleared or approved. BHL is authorized under CLIA to perform high-complexity testing. These laboratory-developed high-complexity tests may incorporate components that are manufactured by our Products business.
BHL offers approximately 40 individual clinical laboratory tests. The tests were selected because of their ability to characterize and monitor cardiovascular disease or lipid or metabolic disorders. The following five tests are unique to BHL as part of its proprietary cardiovascular disease management offerings:
LDL-S 3 GGE ® Test. LDL-S 3 GGE is a BHL proprietary test that measures LDL size as a subclass distribution divided across seven regions (four small and three large) and characterizes the amount of LDL distributed in these regions. This allows for the measurement of LDL subgroup particle size and percent distribution in each region. This separation can also measure defined clinical classifications (i.e., “small LDL trait” and “large LDL trait”). There is a threefold increased cardiovascular disease risk associated with the small LDL trait.
HDL-S 10 GGE ® Test. HDL-S 10 GGE is a BHL proprietary test that measures HDL size as a subclass distribution divided across five HDL regions and characterizes the amount of HDL distributed in these regions. The subclasses are defined as HDL2a, HDL2b, HDL3a, HDL3b, and HDL3c. Low levels of HDL2b are correlated with a two to threefold increased cardiovascular disease risk and have been shown to predict progression of coronary atherosclerosis (the progressive accumulation of cholesterol, calcium, immune cells, and clotted blood vessels) and disease severity.
KIF6 -StatinCheck TM Genotype Test. The KIF6 -StatinCheck TM Genotype test detects a variant in a gene called Kinesin-Like Protein 6, or KIF6 . Research conducted by Celera and our collaborators has shown that approximately 60% of the studied populations have this gene variant and that individuals with the KIF6 variant have up to a 55% increased risk of having a cardiovascular event, such as a fatal heart attack. Studies have also demonstrated that in carriers of the risk variant, the incremental cardiovascular risk can be substantially and significantly reduced by therapy with certain statins (drugs that are available by prescription from a physician). BHL has the capability to run this test on either a whole blood sample or cheek (buccal) swab. See “Item 1A — Risk Factors — Our scientific discoveries may not be replicated in studies by other investigators, which may negatively impact the acceptance of, or reimbursement for, our diagnostic products and testing services” for more information.
LPA -AspirinCheck TM Genotype Test. The LPA -AspirinCheck TM Genotype test is a molecular laboratory developed test which detects a variant of the LPA gene known as 4399Met. Research conducted by Celera and our collaborators has shown that individuals with the LPA gene variant have approximately two-fold higher risk of cardiovascular disease events, such as heart attack and stroke compared with individuals who do not carry this gene variant. The studies have also demonstrated that in carriers of the LPA gene variant, low dose aspirin therapy substantially reduced the risk of a major cardiovascular event. Based on this research data, the LPA genotype test may help clinicians assess the benefit of aspirin therapy as compared to bleeding risk. The study populations predominantly consist of Caucasian men and women and the LPA carrier frequency in the studied populations was approximately 4%. BHL has the capability to run this test on either a whole blood sample or cheek (buccal) swab.
9p21-EarlyMICheck TM Genotype Test. BHL commenced full commercialization in April 2010 of a new molecular laboratory-developed test, called the 9p21-EarlyMICheck TM Genotype Test, to detect sequence variants within the 9p21 locus of chromosome 9. Recent research indicates that a polymorphism on chromosome 9 predicts increased risk for early onset myocardial infarction (early MI), abdominal aortic aneurysm (AAA), and MI/coronary heart disease (CHD). 9p21 carriers had up to a two-fold higher risk of early MI events than noncarriers and 9p21 carriers had up to 74% higher risk of AAA than noncarriers. Identification of 9p21 carriers may allow health care providers to take steps to characterize and reduce risk factors that may contribute to the development or progression of disease. BHL has the capability to run this test on either a whole blood sample or cheek (buccal) swab.
BHL facilitates cardiovascular disease risk management and patient compliance through a series of programs and services available with its testing services. These services involve home, office and field based clinical educators working with BHL patients to develop individualized patient disease management programs based on treatment regimens prescribed by the patient’s healthcare provider and results from the patient’s BHL tests. BHL’s disease management program involves individually-tailored education for nutrition, exercise, stress reduction, and medication compliance designed to help reduce patients’ risk from cardiovascular disease or lipid or metabolic disorders. We believe clinical education helps patients understand their specific risk factors as characterized by the BHL clinical laboratory testing and how medication compliance and lifestyle changes can lessen their individual cardiovascular disease risk profile. Patients who receive BHL testing services are provided access to BHL’s personalized disease management services for a limited period of time following the date of the test.
BHL Sales and Marketing
General. BHL has a direct sales organization focused on expanding its base of healthcare providers who use BHL clinical laboratory testing services through both direct field sales for acquiring new accounts and telesales to expand presence in existing accounts. As of December 25, 2010, BHL had approximately 113 personnel in the field, including 51 sales personnel in select high potential markets in the United States. Our largest concentration of sales personnel is in the Southeast and Texas, although we receive specimens from healthcare providers across the country.
In 2010, BHL received referrals from over 6,600 healthcare providers, processed over 220,000 samples from both new and recurring patients, and performed approximately 1.9 million tests. BHL’s top 150 referral sources represented 45% of its total sample volume in 2010. These clients are predominantly concentrated in ten states, representing areas with some of the highest incidence of cardiovascular disease in the United States. We believe we have penetrated only a small portion of the potential market for BHL’s testing services and disease management programs. As of December 25, 2010, approximately 864,000 unique patients had received BHL testing services. This compares to an estimated 81 million American adults with cardiovascular disease, including 17.6 million with coronary heart disease, according to the American Heart Association.
4myheart Program. To deliver disease management services to patients who have had BHL clinical laboratory testing services, BHL developed the 4myheart Program. This program provides sophisticated cardiovascular risk insights combined with a personalized approach to disease risk management. Clinical educators work with BHL patients to develop individualized education based on treatment regimens prescribed by the patient’s healthcare provider and results from the patient’s BHL tests. The 4myheart Program is primarily phone and web-based, as we believe these mediums lead to greater scalability, flexibility, efficiency and patient access.
BHL also operates 4myheart Centers in selected communities in the United States, where patients can meet with clinical educators in person to work toward cardiovascular risk reduction. 4myheart Centers vary in size, from around 500 square feet to 3,500 square feet, depending on the local market need and perceived opportunity. As of December 25, 2010, BHL operated 14 4myheart Centers. The number of 4myheart Centers has been reduced in recent years as BHL has concentrated on migrating its disease management service to a phone and web-based model.
Reimbursement
Our revenues are highly dependent on our clinical laboratory tests being approved for reimbursement by Medicare, as well as private insurance companies and managed care organizations, commonly referred to, collectively, as “third-party payors.”
BHL accepts assignment for Medicare patients as payment in full on covered tests. Reimbursement from third-party insurance companies varies widely, even from a single payor in a given geographic area and population. Insurance companies often follow the lead of Medicare in determining whether a clinical laboratory test is covered and reimbursable. Reimbursement rates are generally higher for non-government payors where BHL is out-of-network. For the year ended December 25, 2010, revenues from Medicare patients represented approximately 53% of the total BHL revenues.
A large portion of BHL’s clinical laboratory testing business is currently reimbursed by non-governmental third-party payors on an out-of-network, non-participating basis. This means that BHL does not have contracted reimbursement rates with these companies.
BHL also collects various co-payment, co-insurance and deductible amounts from patients. These amounts can vary greatly based upon a patient’s health plan. Additionally, certain third-party payors make reimbursement payments for BHL services to the patient rather than to BHL. In these cases, BHL has to collect both the insurer’s portion and the patient’s portion of the laboratory service fees from the patient. Collecting monies from patients is costly and time consuming.
CEO BACKGROUND
NAME
POSITION
Paul D. Arata
Senior Vice President, Human Resources and Administration
Richard H. Ayers
Director
Jean-Luc BĂ©lingard
Director
Ugo DeBlasi â€
Senior Vice President, Chief Financial Officer
William G. Green
Director
Peter Barton Hutt
Director
Victor K. Lee
Vice President, Chief Intellectual Property Counsel and Assistant Secretary
Scott K. Milsten
Senior Vice President, General Counsel and Corporate Secretary
Gail K. Naughton
Director
Kathy Ordoñez
Chief Executive Officer and Director
Wayne I. Roe
Director
Bennett M. Shapiro
Director
Stacey R. Sias
Senior Vice President, Business Development and Strategic Planning
Thomas J. White
Senior Vice President, Chief Scientific Officer
Michael A. Zoccoli
Senior Vice President, Products Group
MANAGEMENT DISCUSSION FROM LATEST 10K
Background to the Restatement
The restated financial statements correct the following errors:
Classification of Bad Debt Expenses
As a result of applying FASB Accounting Standards Codification Topic 954, Health Care Entities (ASC 954), certain amounts that were previously included in bad debt expenses as a component of selling, general and administrative expenses, have now been correctly reflected as a reduction in revenues. The errors in classification resulted in an overstatement of consolidated revenues and of selling, general and administrative expenses. The effect of correcting these errors has been recorded in the applicable restated periods.
Recognition of Unreimbursed and Uncollectible Charges
Patient test revenues reimbursed by third-party payors are recorded based on the estimated receipts from such payors. Amounts that are determined to be unreimburseable or uncollectible are recorded as an adjustment to revenues. During the second quarter of 2009, certain BHL receivables were determined to be uncollectible. A bad debt charge for these receivables was recorded in the second quarter of 2009. The Company has subsequently determined that a portion of this charge related to prior periods. The effect of correcting this error, and the associated tax effect, has been recorded in the applicable restated periods.
The adjustments made as a result of the restatement are also discussed in Note 3, Restatement of Previously Issued Financial Statements , of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. To further review the effects of the accounting errors identified and the restatement adjustments, see Part II – Item 6 – Selected Financial Data and Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Annual Report on Form 10-K. For a description of the control deficiencies identified by management as a result of our internal reviews, and management’s plan to remediate those deficiencies, see Part II – Item 9A – Controls and Procedures .
See Note 24, Unaudited Quarterly Financial Information , of the Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K for the impact of these adjustments on each of the quarterly periods in the year ended December 26, 2009 and for the first three quarterly periods in the year ended December 25, 2010. Quarterly reports in the year ending December 31, 2011 will include restated results for the corresponding interim periods of 2010. All amounts in this Annual Report on Form 10-K affected by the restatement adjustments reflect such amounts as restated.
The Company has not amended and does not intend to amend its previously filed Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q for the periods affected by the restatement discussed above under “Explanatory Note.” The information that has been previously filed or otherwise reported for these periods has been restated and is superseded by the information in this Annual Report on Form 10-K. As such, the consolidated financial statements and related financial information contained in such previously filed reports should no longer be relied upon. Nor should any earnings releases or other communications relating to the Company’s financial performance during these periods be relied upon.
Overview
The purpose of the following management’s discussion and analysis is to provide an overview of the business of Celera to help facilitate an understanding of significant factors influencing our historical operating results, financial condition, and liquidity and also to convey our expectations of the potential impact of known trends, events, or uncertainties that are reasonably likely to impact our future results. The following should be read in conjunction with our consolidated financial statements and related notes. Historical results and percentage relationships are not necessarily indicative of operating results for future periods.
Business Overview
We are a healthcare business focusing on the integration of genetic testing into routine clinical care through a combination of products and services incorporating proprietary discoveries. We are organized into three reporting segments: a clinical laboratory testing service business (Lab Services); a products business (Products); and a segment that includes other activities under corporate management (Corporate). Our Lab Services business, conducted through Berkeley HeartLab, Inc. (BHL), offers a broad portfolio of clinical laboratory tests and disease management services designed to help physicians improve cardiovascular disease treatment regimens for their patients. Our Products business develops, manufactures, and oversees the commercialization of molecular diagnostic products. Most of this business is conducted through distribution and royalty agreements with Abbott Molecular (Abbott), a subsidiary of Abbott Laboratories. Our Corporate segment includes revenues from royalties, licenses, collaborations and milestones related to the licensing of certain intellectual property and from our former small molecule and proteomic programs.
On July 1, 2008, Applied Biosystems separated the Celera Group reporting unit from Applied Biosystems’ remaining businesses by means of a redemption of each outstanding share of Celera Group common stock in exchange for one share of common stock of Celera Corporation. Upon the separation, we held all of the businesses, assets and liabilities attributed to the Celera Group and became an independent, publicly-traded company. Our common stock began trading on The NASDAQ Stock Market on July 1, 2008 under the symbol “CRA.”
In November 2008, Applied Biosystems merged with Invitrogen Corporation to form a new company, Life Technologies Corporation (Life Technologies). The contractual and commercial relationships we had with Applied Biosystems are now held with Life Technologies as successor to Applied Biosystems. Applied Biosystems is referred to as Life Technologies in this Annual Report on Form 10-K and our original contractual relationships with Applied Biosystems are referred to as contractual relationships with Life Technologies, its successor.
Prior to the split-off, we received substantial administrative services and management from Life Technologies, and engaged in some related-party transactions with Life Technologies. We also benefited from free access to all of Life Technologies’ technology and know-how, and license agreements that Life Technologies had entered into with third parties related to intellectual property.
Although we are now an independent public company, we continue to have contractual and commercial relationships with Life Technologies. We entered into a separation agreement and several related agreements with Life Technologies in connection with the split-off. These agreements govern our relationship with Life Technologies after the split-off and provide for the allocation of employee benefit, tax and certain other liabilities and obligations attributable to periods before the split-off. These agreements also include arrangements with respect to intellectual property and a number of ongoing commercial relationships.
Basis of Presentation
Prior to the split-off, Celera was a reportable segment of Life Technologies and our financial information was included in Life Technologies’ consolidating financial information. Our consolidated financial statements prior to July 1, 2008 include the assets and liabilities of Life Technologies that were specifically attributed to us.
Following the split-off, on July 1, 2008, we became a stand-alone company with our own consolidated financial statements. As a result, the comparability of certain items has been affected, including stockholders’ equity.
In October 2007, we acquired all of the outstanding capital stock of BHL, and substantially all of the assets of Atria Genetics Inc. (Atria), as discussed in Note 4 to our consolidated financial statements. The results of these operations have been included in our consolidated financial statements from the date of their acquisition.
The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements and related disclosures, which have been prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP. All significant intracompany transactions and balances have been eliminated in consolidation.
Fiscal Year Change
In July 2008, our Board of Directors approved a change of the Company’s fiscal year from a June 30 fiscal year end to a 52 or 53 week fiscal year generally ending on the last Saturday in December. We filed a Transition Report on Form 10-KT with the SEC on March 25, 2009 to report our results for the six months ended December 27, 2008. This Annual Report on Form 10-K is for the year ended December 25, 2010.
Business Developments
In December 2010, we submitted a Premarket Approval Application to the U.S. Food and Drug Administration for our KIF6 Genotyping Assay, a new molecular in vitro diagnostic test designed to detect a marker for risk of coronary heart disease independent of traditional risk factors and aid clinical evaluation when statin treatment is being considered. A KIF6 laboratory developed test was made available in the Lab Services segment in April 2008.
In September 2010, we signed an agreement with Abbott for distribution of our CE-marked KIF6 test.
In September 2010, the United States Patent and Trademark Office (USPTO) issued United States Patent 7,799,530 to Celera relating to methods of determining heart attack risk by detecting the KIF6 gene variant and reduction of such increased risk by statin therapy.
In August 2010, the USPTO issued United States Patent 7,781,168 to Celera relating to methods of determining heart attack risk by detecting the Ile4399Met genetic polymorphism in the protease-like domain of LPA .
BHL introduced two new genetic tests in 2010. In July 2010, BHL launched a laboratory developed test for Cytochrome 2C19 ( CYP2C19 ) that identifies carriers of genetic variants that may impact the effectiveness of the anti-platelet drug, Plavix ® (or clopidogrel). In March 2010, BHL launched a laboratory developed test that detects genetic variants in the chromosome 9p21 region that identifies people at elevated risk for early myocardial infarction (MI), or heart attack.
In June 2010, we signed a Declaration of Conformity and applied the CE mark to a real-time PCR (polymerase chain reaction) test for detection of a variant in the KIF6 gene, allowing the test to be marketed in the European Union and other geographic areas that recognize the CE Mark.
The following describes only the areas that are most subject to our judgment. Refer to Note 2 to our consolidated financial statements for a more detailed discussion of our revenue recognition policy.
In the normal course of business, we enter into arrangements whereby revenues are derived from multiple deliverables. In these revenue arrangements, we record revenue as the separate elements are delivered to the customer if the delivered item is determined to represent a separate earnings process, there is objective and reliable evidence of the fair valueof the undelivered item, and delivery or performance of the undelivered item is probable and substantially in our control. Revenues from multiple-element arrangements involving license fees,
upfront payments and milestone payments, which are received and/or billable in connection with other rights and services that represent our continuing obligations, are deferred until all of the multiple elements have been delivered or until objective and verifiable evidence of the fair value of the undelivered elements has been established. We determine the fair value of each element in multiple-element arrangements based on the prices charged when the similar elements are sold separately to third parties. If objective and verifiable evidence of fair value of all undelivered elements exists but objective and verifiable evidence of fair value does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the revenues from delivered elements are not recognized until the fair value of the undelivered element or elements has been determined. Contract interpretation is normally required to determine the appropriate accounting, including whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes, and if so, how the price should be allocated among the deliverable elements, when to begin to recognize revenue for each element, and the period over which revenue should be recognized.
Our service revenues include patient test revenues associated with BHL’s operations. We recognize this revenue on completion of the testing process and when the test results are sent to the ordering healthcare provider. Patients are billed based on established patient fee schedules. Billings for services reimbursed by Medicare, private insurance companies and managed care organizations, commonly referred to, collectively, as “third-party payors,” are recorded as revenues net of allowances for differences between the amounts billed and the estimated receipts from such payors. Differences between estimated allowances and actual cash receipts are recorded as an adjustment to revenue. We periodically adjust these estimates based upon historical payment trends.
Reimbursements from healthcare insurers are generally based on fee-for-service schedules. Payments for clinical testing services made by the government are based on fee schedules set by governmental authorities. Collection of receivables due from patients is subject to credit risk and ability of the patients to pay.
The process for estimating the ultimate collection of receivables associated with our clinical testing business involves significant assumptions and judgments. We estimate and review the collectibility of our receivables based on a number of factors, including the period they have been outstanding. Historical collection and payor reimbursement experience is an integral part of the estimation process related to revenues and allowances for doubtful accounts. We believe that the collectibility of our receivables is linked to the quality of our billing processes, most notably those related to obtaining the correct information in order to bill effectively for the services we provide.
Bad debt expense is recorded in SG&A expenses in order to maintain an appropriate level of allowance for doubtful accounts. The process for determining the appropriate level of allowance for doubtful accounts involves judgement, and considers such factors as the age of the underlying receivables, historical and projected collection trends, the composition of outstanding receivables between third party payors and patients, current economic conditions and regulatory changes. The allowance for doubtful accounts is reviewed for adequacy, at a minimum, on a quarterly basis. An account is fully reserved when reasonable collection efforts have been unsuccessful and it is probable the receivable will not be recovered.
Disease management revenue is deferred and recognized over the period when disease management services are available to the patient.
Our product revenues include sales to Abbott. Our strategic alliance agreement with Abbott was terminated effective October 1, 2008, and replaced with distribution and royalty agreements. Under the terms of the distribution agreement, we recognize product revenue at the time of shipment. Royalties are recognized as earned under the terms of the royalty agreement. Refer to Note 21 to our consolidated financial statements for a description of our relationship with Abbott.
Prior to the termination of the Abbott alliance agreement, all revenues, costs and expenses of the alliance were shared equally by both parties. Research and development and administrative costs incurred by us in connection with the Abbott alliance prior to its termination are presented on a gross basis in our consolidated
statements of operations. At the end of each reporting period, the two companies compared a statement of revenues and expenses for alliance activities recorded by each party. A calculation was made to determine the amount that needed to be paid to evenly split both the revenue and expenses. The payment to us was referred to as the equalization payment, which we recorded as revenue. The timing and nature of equalization revenue led to fluctuations in both reported revenues and gross margins from period to period due to changes in end-user sales of alliance products and differences in relative operating expenses between the alliance partners.
We recognize royalty revenues when earned over the term of the agreement in exchange for the grant of licenses to use our products or some technologies for which we hold patent rights. We recognize revenue for estimates of royalties earned during the applicable period, based on management’s best estimate, which takes into account historical activity, and make changes for actual royalties received in the following quarter. Historically, these differences have not been material to our consolidated financial statements. For those arrangements where royalties cannot be reasonably estimated, we recognize revenue based upon either the receipt of the royalty statements or the receipt of cash from our licensees.
Upfront nonrefundable license fees are recognized when due under contractual agreements, unless there are specific continuing performance obligations requiring deferral of all or a portion of these fees. If we cannot conclude that a license fee is fixed and determinable at the outset of an arrangement, revenue is recognized as payments from third parties become due.
Asset Impairment
Inventory
Inventories are stated at the lower of cost (on a first-in, first-out basis) or market. Reserves for obsolescence and excess inventory are provided based on historical experience and estimates of future product demand. If actual demand is less favorable than our estimates, inventory write-downs may be required.
Investments
Publicly traded minority equity investments are recorded at fair value, with the difference between cost and fair value recorded to accumulated other comprehensive (loss) income within stockholders’ equity. When the fair values of these investments decline below cost, and the decline is viewed as other-than-temporary, the cost basis is written-down to fair value, which becomes the new cost basis, and the write-down is included in current earnings. We determine whether a decline in fair value is other-than-temporary based on the extent to which cost exceeds fair value, the duration of the market decline, the intent to hold the investment, and the financial health of, and specific prospects for, the investee.
Goodwill and Indefinite Lived Intangible Assets
We test goodwill for impairment at the reporting unit level annually during the fourth quarter, or earlier if a significant change in circumstances occurs that would affect the long-term prospects of the reporting unit. We have concluded that our operating segments should be considered as our reporting units for goodwill impairment purposes. If the carrying value of goodwill is determined to be impaired, the amount of goodwill is reduced and a corresponding charge is made to earnings in the period in which the goodwill is determined to be impaired.
A two-step impairment test is used to identify potential goodwill impairment and measure the amount of a goodwill impairment loss to be recognized. The first step of the goodwill impairment test, used to identify
potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered to be impaired, and the second step of the test is not required. If necessary, the second step of the impairment test, used to measure the amount of impairment loss, compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.
The first step of the goodwill impairment review involves the determination of the fair value of our reporting units. This process requires us to make significant judgments and estimates, including assumptions about our strategic plans with regard to our operations and the interpretation of current economic indicators and market valuations. Furthermore, the development of the present value of future cash flow projections includes assumptions and estimates derived from a review of our expected revenue growth rates, profit margins, business plans, cost of capital and tax rates. We also make certain assumptions about, for example, future market conditions, market prices, interest rates, and changes in business strategies. Changes in assumptions or estimates could materially affect the determination of the fair value of a reporting unit, and therefore could eliminate the excess of fair value over carrying value of a reporting unit entirely and, in some cases, could result in impairment. Such changes in assumptions could be caused by the termination of our exclusive distributor agreements, significant reductions by third party payors in coverage or reimbursement rates for our services, or a significant decline in the demand for our services. If we determine that our goodwill is impaired, we would be required to record a non-cash charge that could have a material adverse effect on our results of operations and financial position.
We utilize two methods to determine the fair value of our reporting units: (i) the income approach; and (ii) the market approach. The income approach utilizes the discounted cash flow method, which focuses on the expected cash flow of the reporting unit. In applying this approach, the cash flow available for distribution is calculated for a forecast period and for a terminal year. The cash flow available for distribution and the terminal value (the value of the reporting unit at the end of the estimation period) are then discounted to present value to derive an indication of the value of the business enterprise.
The market approach is comprised of the guideline company and the similar transactions methods. The guideline company method focuses on comparing the reporting unit to select reasonably similar (or guideline) publicly traded companies. Under this method, valuation multiples are: (i) derived from the operating data of selected guideline companies; (ii) evaluated and adjusted based on the strengths and weaknesses of the reporting units relative to the selected guideline companies; and (iii) applied to the operating data of the reporting unit to arrive at an indication of value. We identified ten public companies to use as guideline companies in determining the fair value of our reporting units at December 25, 2010. Revenue multiples of between 1.1 and 1.8 were used in calculating the business enterprise value of our reporting units. As the stock prices of the comparable companies represent minority interests, the calculated equity value of the reporting units was adjusted upwards using a 20% control premium. In the similar transactions method, consideration is given to prices paid in recent transactions that have occurred in the reporting unit’s industry or in related industries. For our 2010 annual impairment analysis, we weighted the income approach and the market approach at 75% and 25%, respectively. The income approach was given a higher weight because it has the most direct correlation to the specific economics of the reporting unit, as compared to the market approach, which was based on multiples of broad-based (i.e., less comparable) companies.
As of December 25, 2010, the fair value of our Lab Services segment, with $103.0 million of goodwill, exceeded its carrying value by approximately 19%. The fair value of our Products segment, with $11.0 million of goodwill, exceeded its carrying value by approximately 63%. To arrive at our cash flow projections utilized in the income approach, we used a reporting unit’s forecast of estimated operating results based on key assumptions such as long-term revenue growth rates, costs and estimates of future anticipated changes in operating margins based on economic and market information. Key assumptions used to determine the fair value of our reporting units at December 25, 2010, were the expected after-tax cash flows for the forecast period and terminal year, terminal growth rates of 5% and weighted average cost of capital of 16%. It is reasonably possible that business performance significantly below our expectations or a deterioration of market and economic conditions could occur. This would adversely impact our ability to meet our projected results, which could cause the goodwill related to our Lab Services or Products segments to become impaired. For example, if our Lab Services segment is not successful in commercializing new genetic tests or experiences significant reductions by third party payors in coverage or reimbursement rates for our servies, or if our exclusive distributor terminates its agreements with us relating to our Products segment, the revenue and income for these segments could adversely and materially deviate from their historical trends and could cause goodwill to become impaired. If we determine that our goodwill is impaired, we would be required to record a non-cash charge that could have a material adverse effect on our results of operations and financial position.
Indefinite lived intangible assets are tested for impairment annually during the fourth quarter of each year, or more frequently if a significant change in circumstances occurs indicating that an asset may be impaired. We acquired trade names with the acquisitions of BHL and Atria in October 2007; these assets are not subject to amortization and are evaluated for impairment using the relief from royalty method. This requires management to make estimates including forecasted revenue, discount rates and royalty rates.
The trade names were evaluated for impairment during the fourth quarter of 2010 as part of our annual impairment test. As of December 25, 2010, the fair values of the trade names acquired with the acquisitions of BHL and Atria exceeded their carrying values by approximately 87% and 67%, respectively, and therefore, no impairment was recognized. Key assumptions used to determine the fair value of our trade names at December 25, 2010, were the expected after-tax relief from royalty cash flows for the periods of 2011 to 2018 (for BHL) and 2011 to 2015 (for Atria), pre-tax royalty rates of 1%, terminal growth rates of 5% and discount rates of 17%.
At December 25, 2010, the trade name acquired with the acquisition of Atria was determined to no longer be indefinitely lived. The Company has transferred the trade name from indefinite lived intangibles assets and will amortize its carrying value of $0.9 million at December 25, 2010 over a life of ten years.
We will continue to test indefinite-lived intangible assets for impairment on an annual basis and in each reporting period in which indicators of impairment are present.
Long-Lived Assets
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events which could trigger an impairment review include, among others, a decrease in the market value of an asset, the asset’s inability to generate income from operations and positive cash flow in future periods, a decision to change the manner in which an asset is used, a physical change to the asset or a change in business climate. We calculate estimated future undiscounted cash flows, before interest and taxes, resulting from the use of the asset and its estimated value at disposal and compare it to its carrying value in determining whether impairment potentially exists. If a potential impairment exists, a calculation is performed to determine the fair value of the long-lived asset. This calculation is based on a valuation model and discount rate commensurate with the risks involved. Third party appraised values may also be used in determining whether impairment potentially exists.
Income Taxes
Deferred taxes represent the difference between the tax bases of assets or liabilities, calculated under tax laws, and the reported amounts in our consolidated financial statements. Deferred tax assets include items that can be used as a tax deduction or credit in our tax return in future years for which we have already recorded the tax benefit in our Consolidated Statements of Operations or items that have already been included in our tax return income but have yet to be recorded as income in our Consolidated Statements of Operations. We record a valuation allowance against deferred tax assets if it is more likely than not that we will not be able to utilize these assets to offset future taxes. We determine if a valuation allowance is necessary based on estimates of future taxable profits and losses, tax planning strategies and other positive and negative evidence.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Business Overview
We are a healthcare business focusing on the integration of genetic testing into routine clinical care through a combination of products and services incorporating proprietary discoveries. Our common stock began trading on The NASDAQ Stock Market on July 1, 2008, following our split-off from Applied Biosystems, Inc. (now Life Technologies Corporation).
We are organized into three reporting segments: a clinical laboratory testing service business (Lab Services); a products business (Products); and a segment that includes other activities under corporate management (Corporate). Our Lab Services business, conducted through Berkeley HeartLab, Inc. (BHL), offers a broad portfolio of clinical laboratory tests and disease management services designed to help physicians improve cardiovascular disease treatment regimens for their patients. Our Products business develops, manufactures, and oversees the commercialization of molecular diagnostic products. Most of this business is conducted through distribution and royalty agreements with Abbott Molecular (Abbott), a subsidiary of Abbott Laboratories. Our Corporate segment includes revenues from royalties, licenses, collaborations and milestones related to the licensing of certain intellectual property and from our former small molecule and proteomic programs.
Basis of Presentation
The discussion and analysis of our financial condition and results of operations is based on our unaudited condensed consolidated financial statements and related disclosures, which have been prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules. All significant intracompany transactions and balances have been eliminated in consolidation.
Business Developments
In September 2010, we signed an agreement with Abbott for distribution of our CE-marked KIF6 test to identify patients at risk of coronary heart disease that is reduced with statin therapy.
In September 2010, the United States Patent and Trademark Office (USPTO) issued United States Patent 7,799,530 to Celera relating to methods of determining heart attack risk by detecting the KIF6 gene variant and reduction of such increased risk by statin therapy.
In August 2010, the USPTO issued United States Patent 7,781,168 to Celera relating to methods of determining heart attack risk by detecting the Ile4399Met genetic polymorphism in the protease-like domain of LPA .
In July 2010, BHL launched a laboratory developed test for Cytochrome 2C19 (CYP2C19) that identifies carriers of genetic variants that may impact the effectiveness of the anti-platelet drug, Plavix® (or clopidogrel).
In June 2010, we extended our research collaboration with Ipsen Pharmaceuticals to use next-generation sequencing technology to identify genetic biomarkers for pharmacogenomic tests for growth failure patients. This followed the completion of the first phase of this project that commenced in November, 2007.
In June 2010, we signed a Declaration of Conformity and applied the CE mark to a real-time PCR (polymerase chain reaction) test for detection of a variant in the KIF6 gene, allowing the test to be marketed in the European Union and other geographic areas that recognize the CE Mark.
In March 2010, BHL launched a laboratory developed test that detects genetic variants in the chromosome 9p21 region that identifies people at elevated risk for early myocardial infarction (MI), or heart attack.
Operating Expenses
SG&A expenses decreased by $2.0 million for the three months ended September 25, 2010 compared to the prior year quarter, primarily due to a $1.2 million decrease in allowance for doubtful accounts expense in our Lab Services segment, reductions in our billing and collection costs in our Lab Services segment and decreased facility-related and outside services costs in our Corporate segment, partially offset by increased costs associated with the expansion of our sales infrastructure in our Lab Services segment and increased legal costs in our Lab Services segment.
The amortization of purchased intangible assets for the three months ended September 25, 2010 and September 26, 2009 related to our acquisitions of BHL and Atria Genetics, Inc. (Atria) in 2007.
A charge of $1.0 million was recorded in employee-related charges, asset impairments and other in our Corporate segment for the three months ended September 25, 2010. This charge related to severance-related costs associated with the restructuring program that we announced in November 2010. A charge of $3.7 million was recorded in employee-related charges, asset impairments and other expenses for the three months ended September 26, 2009. The charge included $3.2 million related to the restructuring program that we announced in July 2009 and $0.5 million related to tax obligations associated with the split-off from Applied Biosystems (now Life Technologies) in July 2008. The restructuring charge included severance-related costs of $2.6 million, of which $1.5 million related to our Lab Services segment, $0.5 million related to our Products segment and $0.6 million related to our Corporate segment. In addition, property-related costs of $0.6 million were recorded in our Lab Services segment.
We received a cash payment of $0.8 million during the three months ended September 25, 2010 related to the settlement with HDL, which we recorded in our Lab Services segment. Remaining cash payments of $3.9 million are expected to be made through 2011. The settlement agreement also provides for HDL to pay BHL an additional amount in 2011 based on samples HDL receives during 2010 from an agreed upon set of healthcare providers. We recorded a charge of $1.0 million in our Products segment for the three months ended September 26, 2009 related to the expected outcome of certain legal proceedings, which have now been settled.
Operating Income (Loss)
Our Lab Services segment had an operating loss of $1.0 million for the three months ended September 25, 2010 compared to $1.5 million for the three months ended September 26, 2009. This was primarily due to decreased allowance for doubtful accounts and employee-related charges, asset impairments and other expenses and proceeds from the HDL legal settlement, partially offset by lower revenues, and increased legal costs. These changes are further described above.
Our Products segment had operating income of $1.6 million for the three months ended September 25, 2010 compared to $0.4 million for the three months ended September 26, 2009. This change was primarily due to the legal settlement charge recorded in 2009 and a decrease in employee-related charges, asset impairments and other expenses, partially offset by a decrease in gross margin, as described above.
Our Corporate segment had an operating loss of $10.2 million for the three months ended September 25, 2010 compared to $7.7 million for the three months ended September 26, 2009. This change was primarily due to a decrease in gross margin, partially offset by lower SG&A expenses and employee-related charges, asset impairments and other expenses, as described above.
Interest Income, Net
Interest income, net for the three months ended September 25, 2010 decreased compared with the prior year quarter primarily due to lower interest rates. Interest income, net for the three months ended September 25, 2010 and the three months ended September 26, 2009 included $0.2 million related to a long-term receivable from Abbott.
Provision for Income Taxes
The tax provision of $0.1 million for the three months ended September 25, 2010 was primarily due to an increase in the deferred tax liability associated with the acquisition of Atria in 2007.
Revenues
Revenues for our Lab Services segment for the nine months ended September 25, 2010 decreased $20.4 million compared to the nine months ended September 26, 2009. The decrease was primarily due to lower sample volume, which declined approximately 24% year over year. Sample volumes were adversely impacted by healthcare industry and competitive pressures, including the loss of business from accounts serviced by former BHL sales representatives identified in the now-settled litigation with a competitor and others (refer to Part II, Item 1, Legal Proceedings) and changes to BHL’s business that were implemented in the second half of 2009.
During the three months ended September 25, 2010, we determined that a significant number of orders received from healthcare providers for additional testing performed on samples previously received and processed by BHL may not have supported payor requirements for amounts billed to, and reimbursements received from, federal healthcare programs and certain other payors. As a result, we recorded a net reduction to revenue in our Lab Services segment of $0.4 million for the nine months ended September 25, 2010. Refer to Note 13 of our unaudited condensed consolidated financial statements.
Revenues for our Products segment for the nine months ended September 25, 2010 decreased $0.2 million compared to the nine months ended September 26, 2009 primarily as a result of lower sales of Celera manufactured products distributed by Abbott, partially offset by increased royalties from sales of RealTi m e TM assays used on the m 2000 TM system.
Corporate revenues, which primarily consist of royalties, licenses and milestones, decreased $11.0 million for the nine months ended September 25, 2010 compared to the nine months ended September 26, 2009. The decrease was due primarily to lower licensing revenue, including the completion of payments from three licensees in the first quarter of 2010, partially offset by higher royalty revenue received from a licensee.
Gross Margin
Gross margin for the nine months ended September 25, 2010 decreased $26.8 million compared to the nine months ended September 26, 2009 primarily as a result of the decrease in net revenues. Gross margin as a percentage of net revenue decreased to 63% for the nine months ended September 25, 2010 from 68% for the nine months ended September 26, 2009, primarily as a result of lower sample volume in our Lab Services segment and a reduction in license revenue in our Corporate segment, partially offset by increased royalties and changes in product mix in our Products segment.
Operating Expenses
SG&A expenses decreased by $22.8 million for the nine months ended September 25, 2010 compared to the prior year period, primarily due to a $23.1 million decrease in allowance for doubtful accounts expense for our Lab Services segment, savings from our 2009 restructuring programs, primarily in our Lab Services segment, and reductions in billing and collection costs in our Lab Services segment, partially offset by increased costs associated with the expansion of our sales infrastructure in our Lab Services segment and increased legal costs in our Lab Services and Corporate segments. The allowance for doubtful accounts expense for the nine months ended September 26, 2009 was primarily due to a provision for accounts receivable over 360 days outstanding and tests that had been denied for reimbursement.
Research and development expenses decreased by $2.2 million for the nine months ended September 25, 2010 compared to the prior year period primarily as a result of the completion of certain discovery research and development projects and lower associated employee-related costs in our Corporate and Products segments.
The amortization of purchased intangible assets for the nine months ended September 25, 2010 and September 26, 2009 related to our acquisitions of BHL and Atria in 2007.
For the nine months ended September 25, 2010, we recorded a net charge of $1.2 million in employee-related charges, asset impairments and other. This included a charge of $1.0 million related to severance costs associated with the restructuring program that we announced in November 2010, and a charge of $0.4 million for additional lease expenses related to a facility previously used by Paracel, Inc., a business we acquired in 2000 and closed in 2005. These charges were recorded in our Corporate segment. Also for the nine months ended September 25, 2010, we recorded the reversal of a previously established accrual of $0.2 million in employee-related charges, asset impairments and other. The reversal, which was primarily recorded in our Lab Services segment, related to severance and related costs associated with our 2009 restructuring activities.
A charge of $4.3 million was recorded in employee-related charges, asset impairments and other expenses for the nine months ended September 26, 2009 primarily related to our July 2009 restructuring program. Costs associated with the restructuring program included severance-related costs of $2.6 million, of which $1.5 million related to our Lab Services segment, $0.5 million related to our Products segment and $0.6 million related to our Corporate segment. In addition, property-related costs of $0.6 million were recorded in our Lab Services segment. Our Corporate segment also included severance and related costs of $0.7 million associated with the closure of our Rockville, Maryland facility and $0.5 million related to tax costs associated with the split-off from Applied Biosystems (now Life Technologies) in July 2008. These costs were partially offset by the reversal of a previous charge of $0.1 million for certain severance-related benefits associated with employees terminated in our February 2008 restructuring action.
We received cash payments of $3.1 million during the nine months ended September 25, 2010 related to the settlement with HDL, which we recorded in our Lab Services segment. Remaining cash payments of $3.9 million are expected to be made through 2011. The settlement agreement also provides for HDL to pay BHL an additional amount in 2011 based on samples HDL receives during 2010 from an agreed upon set of healthcare providers. We also received a $0.5 million cash insurance settlement during the nine months ended September 25, 2010, which was recorded in our Corporate segment. We recorded a charge of $1.0 million in our Products segment for the nine months ended September 26, 2009 related to the expected outcome of certain legal proceedings.
A $15.7 million non-cash charge for the impairment of intangible assets relating to the trade names of BHL and Atria was recorded in our Corporate segment for the nine months ended September 26, 2009.
Operating Income (Loss)
Our Lab Services segment had an operating loss of $5.9 million for the nine months ended September 25, 2010 compared to $17.5 million for the nine months ended September 26, 2009. This change was primarily due to decreased allowance for doubtful accounts, proceeds from the HDL legal settlement and decreased employee-related charges, asset impairments and other expenses, partially offset by lower revenues. These changes are further described above.
Our Products segment had operating income of $5.8 million for the nine months ended September 25, 2010 compared to $2.2 million for the nine months ended September 26, 2009. This change was primarily due to an increase in gross margin, the charge related to certain legal proceedings recorded for the nine months ended September 26, 2009, decreased research and development expense and decreased employee-related charges, asset impairments, and other expenses. These changes are further described above.
Our Corporate segment had an operating loss of $30.3 million for the nine months ended September 25, 2010 compared to $36.7 million for the nine months ended September 26, 2009. This change was primarily due to a $15.7 million non-cash impairment charge recorded for the nine months ended September 26, 2009 related to our indefinite lived intangible assets. Our Corporate segment’s operating loss was further impacted by decreased revenue, partially offset by lower research and development expenses, an insurance settlement, and decreased employee-related charges, asset impairments and other expenses. These changes are further described above.
Interest Income, Net
Interest income, net for the nine months ended September 25, 2010 decreased $1.6 million compared with the prior year period primarily due to lower interest rates. Interest income, net for the nine months ended September 25, 2010 and the nine months ended September 26, 2009 included $0.7 million related to a long-term receivable from Abbott.
(Provision) Benefit for Income Taxes
The tax provision of $0.3 million for the nine months ended September 25, 2010 was primarily due to an increase in the deferred tax liability associated with the acquisition of Atria in 2007.
We recorded a tax benefit of $6.3 million for the nine months ended September 26, 2009. This benefit was primarily the result of a reduction in a deferred tax liability associated with the intangible asset impairment charge referred to above, partially offset by an increase in our valuation allowance for state deferred tax assets.
Off-Balance Sheet Arrangements
An off-balance sheet arrangement includes any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which we would have: (1) retained a contingent interest in transferred assets; (2) an obligation under derivative instruments classified as equity; (3) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or that engages in leasing, hedging or research and development services with us; or (4) made guarantees.
At September 25, 2010 and September 26, 2009, we had no off-balance sheet arrangements.
Critical Accounting Estimates
There have been no material changes to our critical accounting policies and estimates from the disclosures made in Management’s Discussion and Analysis of Financial Conditions and Results of Operations included in our Annual Report on Form 10-K for the year ended December 26, 2009 filed with the SEC on March 10, 2010.
Recent Accounting Pronouncements
Refer to Note 2 to our unaudited condensed consolidated financial statements for a description of the effect of recently adopted accounting pronouncements.
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Fund Letters
