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Article by DailyStocks_admin    (07-18-08 06:57 AM)

Filed with the SEC from July 3 to July 9:

Third Wave Technologies (TWTI)
A group of funds managed by Mario Gabelli's Gamco Investors reported holdings of about 3.06 million shares (6.94%) in the molecular diagnostics company. It purchased the stake from June 9 to July 2 at $11.11 to $11.20 a share.

BUSINESS OVERVIEW

OVERVIEW

Third Wave Technologies, Inc. develops and markets molecular diagnostics for a variety of DNA and RNA analysis applications, providing our clinical, research and agricultural customers with superior molecular solutions. Our products are based on our proprietary Invader chemistry. It is a novel, molecular chemistry that we believe is easier to use, more accurate and cost-effective than competing technologies. Third Wave was incorporated in California in 1993 and reincorporated in Delaware in 2000.

We believe the market of greatest application and commercial opportunity for Third Wave’s Invader chemistry is clinical molecular diagnostics. We estimate that this market is approximately $2.1 billion worldwide today and will grow by 10-15% annually over the next five years. Within this market, there are a number of diverse segments for which our chemistry is well suited, including women’s health testing including tests for the human papillomavirus (HPV), genetics and pharmacogenetics, infectious disease and oncology. In addition to the molecular diagnostics market, the utility of the Invader chemistry has been extended to research and agricultural applications.

THIRD WAVE MISSION AND CORPORATE STRATEGY

Our mission is to be a leading provider of superior molecular solutions. We seek to achieve our mission by continuing to convert our proprietary Invader molecular chemistry into valuable molecular diagnostic products.

We have implemented a strategy to:


• Grow our global clinical molecular diagnostic revenue through our expanding product menu by using our strong distribution and thought-leader networks;

• Continue to expand our pipeline of molecular diagnostic products and enhance our product capabilities; and

• Partner when appropriate to optimize our opportunities in molecular diagnostics and in markets where the Invader chemistry can create unique competitive advantages.

TECHNOLOGY

Invader Chemistry

The Invader chemistry is a simple and scalable DNA and RNA analysis solution designed to provide accurate results more quickly than competing technologies. It is an isothermal, DNA-probe-based reaction that detects specific genomic sequences or variations.

The performance and flexibility of Invader chemistry can be coupled with the sensitivity of a rudimentary form of polymerase chain reaction (whose patents have expired). We call this combination Invader Plus and believe that it will bring the advantages of both chemistries to our customers, enabling them to perform molecular testing more easily and more rapidly.

We have developed, and will to continue to develop, a line of clinical molecular diagnostic products based on our Invader chemistry. Clinical applications of the Invader chemistry include detecting genetic variations associated with inherited conditions such as cystic fibrosis, hemostasis and cardiovascular risk factors, and those associated with drug efficacy and adverse drug reactions. They also include confirming diagnosis, quantifying viral load and genotyping for infectious diseases such as hepatitis B and C, and for detecting human papillomavirus (HPV). We have received in vitro diagnostic device clearance from the U.S. Food and Drug Administration (FDA) for our Invader UGT1A1 molecular assay. The Invader UGT1A1 molecular assay is cleared for use to identify patients who may be at increased risk of adverse reaction to the chemotherapy drug Camptosar ® (irinotecan) by detecting and identifying specific mutations in the UGT1A1 gene. Camptosar, marketed in the U.S. by Pfizer, Inc., is used to treat colorectal cancer and was relabeled in 2005 to include dosing recommendations based on a patient’s genetic profile.

In addition to our growing menu of clinical products, there are a number of other Invader chemistry applications, including research, agriculture, and other potential industrial applications, including food and water testing.

INDUSTRY BACKGROUND

Prior to the late 1990s, many diagnostic testing methods had limited accuracy and served primarily as guides to analysis. This has changed with the emergence of nucleic acid testing, also referred to as NAT or molecular diagnostic testing.

Nucleic acid testing is the direct analysis of DNA or RNA. It is accomplished through genotyping, the determination of whether a variation or series of variations are present in an individual, or gene expression analysis, the determination of the level of activity of a specific gene by quantitating the messenger RNA, or mRNA, it is producing. The advantage of this testing method is that it directly detects DNA or RNA rather than monitoring antigens or antibodies. Initially NAT was used primarily for HIV and blood screening, but it is rapidly displacing conventional testing methods as the industry standard for a variety of applications. For example, the need to perform accurate blood screening and tests for infectious diseases/viral loads has resulted in NAT replacing immunotechnology (immunoassays) as the solution of choice among many clinical laboratories.

Ongoing scientific research has helped determine that a majority of human diseases have genetic components. The monumental feat of mapping and sequencing of the entire human genome, through the Human Genome Project and subsequent research initiatives, are being translated into precise clinical applications to diagnose and treat disease. As a result, hundreds of molecular diagnostic tests based on NAT technology are now being used to identify variations in DNA sequence to detect disease or highlight genetic predispositions. Furthermore, researchers’ continuing progress in understanding disease and definitively linking particular diseases to an individual’s DNA and RNA have caused key medical thought leaders to introduce new screening guidelines that incorporate NAT.

The availability of the human genome sequence, combined with an ever-growing list of known variations in DNA sequence and advances in our understanding of the cause and progression of disease, will likely result in the emergence of additional NAT applications. As a result, we believe that a significant increase in demand for gene-based tests will occur in the coming years.

PRODUCTS AND PRODUCT CANDIDATES

We have applied our proprietary Invader chemistry to a number of molecular diagnostic, research and other applications. We have a pipeline of new products under development and are assessing the technical feasibility and commercial viability of a number of other applications.

Molecular Diagnostics

PRODUCTS ON THE MARKET — UNITED STATES

InVitro Diagnostic (IVD) Devices


• Invader UGT1A1 Molecular Assay

Analyte Specific Reagents/Research Use Only (ASRs/RUO)


• Hepatitis C virus genotyping (HCVg)

• Cystic Fibrosis Transmembrane Conductance Regulator gene (CFTR InPlex tm )

• Human Papillomavirus (HPV)

• Connexin 26 (35delG)

• Connexin 26 (167delT)

• Factor V (Leiden)

• Factor II (prothrombin)

• Apolipoprotein E (ApoE) (C112R)

• Apolipoprotein E (ApoE) (R158C)

• Plasminogen Activator Inhibitor-1 (PAI-1) (4G/5G)

• Platelet Glycoprotein IIIa (PL A1/A2) (Leu 33 Pro, T1565C)

• Warfarin (VKORC1 (-1639)), (CYP2C9*2), (CYP2C9*3)

• Rett (McCP2)

• Methylenetetrahydrofolat e Reductase (MTHFR)

• CYP2C19

• CYP2C9

• CYP450

PRODUCTS ON THE MARKET — EUROPEAN ECONOMIC AREA (EEA)

InVitro Diagnostic Devices — CE Mark


• HPV High Risk Molecular Assay

• Factor V Leiden (G1691A)

• Factor II (FII G20210A)

• Methylenetetrahydrofolat e Reductase (MTHFR) (C677T)

• Methylenetetrahydrofolate Reductase (MTHFR) (A1298C)

• Apolipoprotein E (ApoE) (C112R)

• Apolipoprotein E (ApoE) (R158C)

• Plasminogen Activator Inhibitor-1 (PAI-1) (4G/5G)

• Platelet Glycoprotein IIIa (PL A1/A2) (Leu 33 Pro, T1565C)

• Connexin 26 (35delG)

• Connexin 26 (167delT)

PRODUCTS IN DEVELOPMENT OR BEING ASSESSED FOR TECHNICAL FEASIBILITY AND COMMERCIAL VIABILITY


• Additional HPV offerings

• Additional CFTR offerings

• HBV Viral Load

• Herpes simplex virus (HSV 1 & 2)

• Cytomegalovirus (CMV)

• Microbacterium

• Methicillin-resistant Staphylococcus aureus (MRSA)

• Chlamydia

• Gonorrhea

• Additional infectious disease targets

• Hepatitis B virus

• Micro RNA panels

We also have developed a number of DNA and RNA analysis products for the research and agricultural biotechnology markets.

MANUFACTURING

We manufacture products at our facility in Madison, Wisconsin and source certain components from various contract manufacturers. We work closely with the vendors of these components to optimize the manufacturing process, monitor quality control and ensure compliance with our product specifications. Together with our component contract manufacturers, we have scalable manufacturing systems, possess the expertise necessary to manufacture our products and have sufficient capacity to meet our customer requirements.

Certain key components of our products may be sourced from a single supplier or a limited number of suppliers. In addition, some of the components incorporated into our products may be proprietary and unavailable from secondary sources.

We have registered the facility used for manufacturing our clinical products with the FDA as a Device Manufacturer and believe we are in substantial compliance with the FDA’s quality system requirements or QSRs. We have also achieved ISO 13485:2003 Certification, a stringent, globally-recognized standard of quality management for medical device manufacturers.

MARKETING AND SALES

We currently market and sell our products globally through a combination of direct sales personnel who are focused primarily on the clinical market, and through collaborative relationships. Our clinical sales force is comprised of 34 direct sales representatives and technical support personnel. We plan to increase our sales force as market demand requires. The clinical sales force targets high-volume clinical reference laboratories that meet the criteria for highly-complex CLIA laboratories.

We have more than 215 clinical testing customers in the U.S. and we serve most major clinical laboratories that perform molecular testing. During 2007, the majority of our product sales were to domestic clinical laboratories.

Our products for the research market are sold primarily through direct sales efforts in the U.S. and in Japan.

Third Wave has established a strong and direct presence in Japan. In 2002, we established a wholly-owned subsidiary for the purpose of working more directly with our customers, collaborators and distributors in the Japanese market. We have 14 employees based in Japan. In April 2006 and May 2007 we sold a minority interest in our Japan subsidiary to Mitsubishi Corporation and CSK Institute for Sustainability, LTD and certain other investors. As part of this transaction, we are working together with Mitsubishi to accelerate the penetration of Invader products in Asia-Pacific clinical laboratories, particularly in Japan.

In December 2000, we entered into a development and commercialization agreement with BML, Inc., (“BML”), one of the two largest clinical reference laboratories in Japan. Through this agreement, the companies are collaborating to develop and commercialize molecular diagnostics for infectious disease, genetic testing and pharmacogenomics. Under the agreement, we develop mutually agreed upon clinical assays and BML purchases product. As provided by the terms of the agreement, we develop and supply BML with clinical reagents at preferential prices. We have certain rights to commercialize the developed assays worldwide; however, such commercialization rights are limited in Japan depending on BML’s intellectual property surrounding the specific assay. Further, BML has the right to negotiate the terms and conditions under which BML would have the right to use the developed assays for providing clinical testing services in Japan. The term of the agreement is until December 31, 2009.

Our customer base is dominated by a small number of large clinical-testing laboratories (Quest Diagnostics, Inc., Mayo Medical Laboratories, Kaiser Permanente, Spectrum Laboratory Network and Berkeley Heart Laboratories) and research customers (University of Tokyo/RIKEN and Pioneer Hi-Bred International, Inc.). In 2007 and 2006, we generated $8.9 million (29% of total revenue) and $8.5 million (30% of total revenue), respectively, from sales to these large clinical-testing laboratories. In addition, in 2007 and 2006 we generated $2.9 million (10% of total revenue) and $5.5 million (20% of total revenue), respectively, from sales to these research customers. If we are unable to maintain current pricing levels and/or volumes with these customers, our revenues and business may suffer materially. See Part I, Item 1A — Risk Factors.

We intend to continue to pursue domestic and international market opportunities through a combination of direct sales, distribution arrangements and collaborative relationships. The Company began sales into the EU market through distribution arrangements in 2007 and expects to continue expansion in the EU market in 2008.

For a description of our industry segment and our product revenues by geographic area, see Note 17 of the Notes to the Consolidated Financial Statements included under Item 8 of this Form 10-K. As described in this Note, in 2007 we derived approximately 11% of our product revenues from sales to international end-users. See Part I, Item 1A — Risk Factors.

Our business is generally not seasonal.

CEO BACKGROUND

James Connelly has served as a director since July 2005. Mr. Connelly is a partner in the Foley & Lardner law firm, where he served as founding chairman of the health law practice. He brings to Third Wave more than 25 years of experience providing strategic business and legal advice to large health care networks, clinics and laboratories. He also has advised a number of emerging biotechnology and life sciences companies. Mr. Connelly earned his bachelor’s degree from Marquette University and his law degree from the Georgetown University Law Center. He has served as a director and chairman of the board of numerous privately-held businesses and currently serves on the board of trustees of Ripon College.

Lionel Sterling has served as a director since August 2004. Mr. Sterling is president of Equity Resources, Inc., a private investment firm. He previously co-founded and served as managing partner of the private investment firm Whitehead/Sterling. He serves on the board of Molecular Insight Corporation. He also has served as chairman of the board of directors of Rayovac Corporation, Executive Vice President and Director of United Brands Company, and Sector Executive and Chief Financial Officer of American Can Company. He also held various investment and financial positions at Donaldson, Lufkin & Jenrette Inc. and ITT Corporation. Mr. Sterling holds an M.B.A. from New York University.

Gordon F. Brunner has served as a director since January 2003. Mr. Brunner served as Chief Technology Officer as well as a member of the board of directors of the Procter & Gamble Company, until his retirement after 40 years of service. He has extensive experience leveraging innovative technology platforms to the pharmaceutical, over-the-counter and consumer markets. He received a B.S. degree in biochemical engineering from the University of Wisconsin-Madison and an M.B.A. degree from Xavier University. Mr. Brunner is a partner in the Cincinnati Midtown Health Center and serves as a director of privately-held Iams Imaging and Beverage Holdings, LLC. He

also serves on the boards for Christ Hospital (Cincinnati, Ohio), the Wisconsin Alumni Research Foundation and Xavier University.

Kevin T. Conroy has served as our President and Chief Executive Officer and as one of our directors since December 2005. Mr. Conroy joined Third Wave as Vice President of Legal Affairs in July 2004 and served as General Counsel from October 2004 to December 2005. Prior to joining Third Wave, Mr. Conroy worked for GE Healthcare, where he oversaw the development and management of its information technologies group intellectual property portfolio, and developed and executed litigation, licensing, and corporate product acquisition legal strategies. Before joining GE, Mr. Conroy was Chief Operating Officer of two early stage venture-based technology companies in Northern California. Prior to those positions, he was an intellectual property litigator at two Chicago law firms, McDermott Will & Emery, and Pattishall, McAuliffe, Newbury, Hilliard and Geraldson, where he was a partner. He earned his B.S. in electrical engineering at Michigan State University and his J.D. from the University of Michigan.

Lawrence Murphy has served as a director since January 2006. Mr. Murphy, an independent business consultant, brings to Third Wave’s board more than 30 years of business experience in strategic partnerships, mergers and acquisitions, operations, finance, law and administration. Mr. Murphy served as executive vice president and secretary of Core Industries, Inc., a publicly-held (NYSE) diversified manufacturer, from 1981 until its sale in 1997. He was a practicing attorney and certified public accountant before joining Core Industries. He received a B.S. degree in accounting from the University of Detroit Mercy and a J.D., cum laude, from Wayne State University Law School. Mr. Murphy serves as a director of Jabil Circuit, Inc., a publicly-held (NYSE) global electronics manufacturing service company with more than $10 billion in revenue.

Katherine Napier has served as a director since June 2006. Ms. Napier is a 20-year veteran of Procter & Gamble, where from 1979 to 2002 she rose from assistant brand manager to vice president and general manager of the company’s North American pharmaceutical business, which experienced unprecedented growth during her five year tenure, including the launch of Actonel, the company’s fastest growing brand ever to $1 billion. Most recently, Ms. Napier served as senior vice president of marketing at McDonald’s Corporation where she led the development and execution of that company’s strategy to reinvigorate its business with women and families. She received her B.A. in economics and Studio Fine Arts from Georgetown University and an M.B.A. in marketing and finance from Xavier University. Ms. Napier serves on the board of the Alberto Culver Company and Mentor Corporation, Catholic Health Care Partners, Xavier University, and the board of visitors of Wake Forest University Calloway School of Business.

David A. Thompson , Chairman and Lead Independent Director, has served as one of our directors since August 1997 and as Chairman and Lead Independent Director since 2005. Mr. Thompson retired from Abbott Laboratories in 1995, where he worked for more than 30 years. He held several corporate officer positions with Abbott Laboratories, including: Senior Vice President & President Diagnostic Division 1983-1995, Vice President Human Resources 1982-1983, Vice President Corporate Materials Management 1981-1982 and Vice President Operations 1974-1981.

MANAGEMENT DISCUSSION FROM LATEST 10K

OVERVIEW

Third Wave Technologies, Inc. is a leading molecular diagnostics company. We believe our proprietary Invader chemistry, a novel, molecular chemistry, is easier to use and more accurate than competing technologies. These and other advantages conferred by our chemistry are enabling us to provide clinicians and researchers with superior molecular solutions.

More than 215 clinical laboratory customers are using Third Wave’s molecular diagnostic reagents. Other customers include pharmaceutical and biotechnology companies, academic research centers and major health care providers. The Company has consistently grown its core clinical diagnostic revenues for the last ten consecutive quarters and in 2007, the clinical revenues grew 25% over prior year.

Currently, one of our key strategic initiatives is the commercialization of our Human Papillomavirus (HPV) offering. In August 2006, we began clinical trials for two HPV premarket approval submissions to the FDA. We expect to spend $17-18 million on these submissions over three years. If for any reason these trials are not successful or are substantially delayed or for any other reason we are unable to successfully commercialize our HPV offering, our business and prospects would likely be materially adversely impacted. Additionally, we anticipate significant competition in the HPV market as additional large competitors have announced plans to enter the market in the near future. This competition may have a significant impact on the success of our commercialization of our HPV offering.

We market a growing number of products, including analyte specific reagents (ASRs). These ASRs allow certified clinical reference laboratories to create assays to perform hepatitis C virus genotyping, inherited disorders testing (e.g., Factor V Leiden), and a host of other mutations associated with genetic predispositions and other diseases (e.g. Cystic Fibrosis). We have developed or plan to develop a menu of molecular diagnostic products for clinical applications that include women’s health applications, hospital acquired infections, genetics and pharmacogenetics, and oncology. We also have a number of other Invader products including those for research, agricultural and other applications.

The FDA has issued a guidance document regarding the sale of ASRs. This guidance document may negatively impact our ability to continue to successfully market and sell our ASR products.

In August 2005, we received clearance from the FDA for our Invader UGT1A1 Molecular Assay. The Invader UGT1A1 Molecular Assay is cleared for use to identify patients who may be at increased risk of adverse reaction to the chemotherapy drug Camptosar ® (irinotecan) by detecting and identifying specific mutations in the UGT1A1 gene that have been associated with that risk. Camptosar, marketed in the U.S. by Pfizer, Inc., is used to treat colorectal cancer and was relabeled in 2005 to include dosing recommendations based on a patient’s genetic profile. In December 2006, we submitted a cystic fibrosis product to the FDA.

Our financial results may vary significantly from quarter to quarter due to fluctuations in the demand for our products, timing of new product introductions and deliveries made during the quarter, the timing of research, development and grant revenues, and increases in spending, including expenses related to our product development submissions for FDA clearances or approvals and intellectual property litigation.

CRITICAL ACCOUNTING POLICIES

Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. We review the accounting policies we use in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to accounts receivable, inventories, equipment and leasehold improvements and intangible assets. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. These estimates and judgments are reviewed by management on an ongoing basis, and by the Audit Committee at the end of each quarter prior to the public release of our financial results. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

REVENUE RECOGNITION

Revenue from product sales is recognized upon delivery which is generally when the title passes to the customer, provided that the Company has completed all performance obligations and the customer has accepted the products. Customers have no contractual rights of return or refunds associated with product sales. Consideration received in multiple element arrangements is allocated to the separate units based upon their relative fair values. The multiple element arrangements involve contracts with customers in which the Company is selling reagent products and leasing equipment to the customer for use during the term of the contract. Based upon the guidance in paragraph 9 of Emerging Issues Task Force (EITF) No. 00-21 “Revenue Arrangements with Multiple Deliverables,” both the reagents and equipment have value to the customer on a standalone basis, there is objective and reliable evidence of fair value for both the reagents and equipment and there are no rights of return. The Company has sold both the reagents and equipment separately, and therefore is able to determine a fair value for each. The respective fair values are used to allocate the proceeds received to each of the elements for purposes of recognizing revenue.

Grant revenues consist primarily of research grants from agencies of the federal government, the revenue from which is recognized as research is performed. Payments received which are related to future performance are deferred and recorded as revenue when earned.

License and royalty revenue includes amounts earned from third parties for licenses of the Company’s intellectual property and are recognized when earned under the terms of the related agreements. License revenues are generally recognized upon receipt unless the Company has continuing performance obligations, in which case the license revenue is recognized ratably over the period of expected performance.

LONG-LIVED ASSETS — IMPAIRMENT

Equipment, leasehold improvements and other intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For assets held and used, if the sum of the expected undiscounted cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair value and carrying value of the asset or group of assets. For assets removed from service and held for sale, we estimate the fair market value of such assets and record an adjustment if fair value less costs to sell is lower than carrying value. There was no impairment in 2007 and 2006. An impairment loss of $203,000 was recorded in 2005 related to the write-down of certain equipment to its fair value.

Goodwill is not amortized, but is subject to an annual impairment test under Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets . We completed annual impairment tests in the quarters ended September 30, 2007, 2006, and 2005 and concluded that no goodwill impairment existed.

INVENTORIES — SLOW MOVING AND OBSOLESCENCE

Significant management judgment is required to determine the reserve for obsolete or excess inventory. Inventory on hand may exceed future demand either because of process improvements or technology advancements, the amount on hand is more than can be used to meet future need, or estimates of shelf lives change. We currently consider all inventory that we expect will have no activity within one year or within the period defined by the expiration date of the product, as well as any additional specifically identified inventory (including inventory that we determine to be obsolete based on criteria such as changing manufacturing processes and technologies) to be excess inventory. At December 31, 2007 and 2006, our inventory reserves were $616,000, or 11% of our $5.6 million total gross inventories, and $655,000 or 16% of our $4.2 million total gross inventories, respectively.

STOCK-BASED COMPENSATION EXPENSE

Prior to 2006, we accounted for share-based payments to employees using Accounting Principles Board (APB) Opinion No. 25’s intrinsic value method and, as such, generally recognized no compensation cost for employee stock options when granted. On January 1, 2006 we adopted SFAS No. 123(R) “Share-Based Payments” as a result of which we recognize expense for all share-based payments to employees, including grants of employee stock options and restricted stock units, based on their fair values. We have adopted the modified prospective transition method as permitted by SFAS No. 123(R).

In October 2006, our audit committee concluded a voluntary investigation of the Company’s historical stock option granting practices and related accounting. This investigation, which was conducted with the assistance of outside legal counsel, covered the timing, pricing and authorization of all our stock option grants made since our initial public offering in February 2001. Based on this review, it was determined that incorrect measurement dates were used with respect to the accounting for certain previously granted stock options, primarily during the years 2002 through 2004. The audit committee concluded that deficiencies in the grant process were the result of administrative errors and misunderstanding of applicable accounting rules, and were not attributable to fraud or intentional misconduct.

We recorded an additional stock-based compensation charge totaling $176,000 in the quarter ended September 30, 2006, representing the effect of the immaterial adjustment resulting from the charges discussed above that relate to 2006. Additionally, we recorded a reclassification between accumulated deficit and additional paid in capital, within the equity section of the consolidated balance sheet as of December 31, 2006, of approximately $731,000. This reclassification represents the effect of the immaterial adjustment resulting from the charges discussed above that related to fiscal year 2005 and prior years. There were no significant income tax effects relating to this adjustment for the Company.

RESULTS OF OPERATIONS

Years Ended December 31, 2007 and 2006

Revenues. Revenues for the year ended December 31, 2007 of $31.1 million represented an increase of $3.1 million as compared to revenues of $28.0 million for the year ended December 31, 2006. Following is a discussion of changes in revenues:

Clinical molecular diagnostic product revenues increased to $26.3 million in 2007 from $20.9 million in 2006. The increase in revenue is due to an increase in the number of customers buying our products and growth in purchases from current customers. We expect our clinical molecular diagnostic revenues to continue to increase in 2008.

Research product revenues decreased significantly to $4.6 million in the year ended December 31, 2007 from $6.8 million in the year ended December 31, 2006. The decrease in research product sales during 2007 resulted from a significant decrease in genomic research product sales to a Japanese research institute for use by several end users compared to the prior year.

License and royalty revenue was $0.3 million in 2007 compared to $0.2 million in 2006.

Significant Customers. We generated $8.9 million, or 29% of revenues, from sales to a small number of large clinical testing laboratories (Quest Diagnostics, Inc., Mayo Medical Laboratories, Kaiser Permanente, Spectrum Laboratory Network, and Berkeley Heart Laboratories) during the year ended December 31, 2007, compared to $8.5 million, or 30% of revenues, in 2006.

Cost of Goods Sold. Cost of goods sold consists of materials used in the manufacture of product, depreciation on manufacturing capital equipment, salaries and related expenses for management and personnel associated with our manufacturing and quality control departments and amortization of licenses and other intangible assets. Cost of goods sold remained consistent despite increased revenue at $8.4 million for the years ended December 31, 2007 and December 31, 2006 due to operating improvements in manufacturing.

Research and Development Expenses. Our research activities are focused on moving our technology into broader markets. Our development activities are focused on new products to expand our molecular diagnostics menu. Research and development expenses consist primarily of salaries and related personnel costs, material costs for assays and product development, fees paid to consultants, depreciation and facilities costs and other expenses related to the design, development, testing, (including clinical trials to validate the performance of our products) and enhancement of our products, and acquisition of technologies used in our products. Research and development costs are expensed as they are incurred. Research and development expenses were $22.8 million for the year ended December 31, 2007, an increase of $10.4 million, compared to $12.4 million for the year ended December 31, 2006. The increase in research and development expenses was primarily due to an increase in personnel related expenses, and an increase in product development expense (including clinical trial costs incurred by us in pursuit of FDA premarket approval for our HPV offerings) of $8.5 million. We will continue to invest in research and development, and expenditures in this area will increase as we expand our product development efforts.

Selling and Marketing Expenses. Selling and marketing expenses consist primarily of salaries and related personnel costs for our sales and marketing management and field sales force, commissions, office support and related costs, and travel and entertainment. Selling and marketing expenses for the year ended December 31, 2007 were $11.5 million, an increase of $0.4 million, as compared to $11.1 million for the year ended December 31, 2006. The increase is mainly attributable to increase in consulting and personnel related expenses.

General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related expenses for executive, finance and other administrative personnel, legal and professional fees, office support and depreciation. General and administrative expenses decreased to $14.3 million for the year ended December 31, 2007, from $14.8 million for the year ended December 31, 2006. The decrease in general and administrative expenses was primarily due to a decrease in personnel related expenses, sales tax charges and consulting fees totaling $1.6 million, offset by an increase in stock-based compensation of $1.1 million.

Litigation Expense. Litigation expense consists of legal fees and other costs associated with patent infringement and other lawsuits. Litigation expense increased to $5.3 million in the year ended December 31, 2007 from $1.6 million in 2006. The increase was due primarily to costs associated with the successful patent infringement lawsuit against Stratagene Corporation and the increased litigation activity in the patent infringement lawsuit with Digene Corporation.

Restructuring. In the year ended December 31, 2006 a restructuring adjustment credit of $0.2 million was recorded to account for changes in the building lease payments.

Interest Income. Interest income for the year ended December 31, 2007 was $2.0 million, compared to $1.5 million for the year ended December 31, 2006.

Interest Expense. Interest expense for the years ended December 31, 2007 was $1.3 million compared to $0.2 million in 2006. The increase in interest expense was due to the interest accretion on the convertible note payable we issued in December 2006.

Other Income (Expense). Other income was $13.1 million during 2007, compared to an expense of $0.2 million in 2006. Other income for the year ended December 31, 2007 included $10.75 million from the settlement of patent litigation with Stratagene Corporation and the reversal of certain accruals no longer deemed probable of payment.

Minority Interest. Minority interest represents Third Wave Japan’s minority investors’ percentage share of the equity and earnings of the subsidiary. Minority interest for the year ended December 31, 2007 was $0.6 million compared to $0.2 million for the year ended December 31, 2006.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS
Three Months Ended March 31, 2008 and 2007
NET INCOME (LOSS). Net loss for the three months ended March 31, 2008 was $7.6 million compared to net income of $4.8 million for the corresponding period of 2007. The change in the results from operations was primarily due to the impact of the $10.75 million of other income from the settlement of patent litigation with the former Stratagene Corporation in 2007.
REVENUES. Revenues for the three months ended March 31, 2008 of $8.4 million represented an increase of $1.7 million, compared to revenues of $6.7 million for the corresponding period of 2007. Following is a discussion of changes in revenues:
Clinical molecular diagnostic product revenue increased to $7.4 million in the quarter ended March 31, 2008 from $6.0 million in the quarter ended March 31, 2007. The increase in revenue is due to an increase in the number of customers and growth in purchases from current customers.
Research product revenues increased to $1.0 million in the three months ended March 31, 2008 from $0.6 million in the three months ended March 31, 2007.
Significant Customers. In the three months ended March 31, 2008, we generated $2.2 million, or 27% of our revenue, from sales to a small number of large clinical testing laboratories compared to $2.3 million, or 34% of our revenue, in the same period of 2007.
COST OF GOODS SOLD. Cost of goods sold consists of materials used in the manufacture of product, depreciation on manufacturing capital equipment, salaries and related expenses for management and personnel associated with our manufacturing and quality control departments and amortization of licenses and other intangible assets. For the three months ended March 31, 2008, cost of goods sold increased to $2.2 million, compared to $2.0 million for the corresponding period of 2007. The increase in the three month period was primarily due to the increase in sales volume.
RESEARCH AND DEVELOPMENT EXPENSES. Our research activities are focused on moving our technology into broader markets. Our development activities are focused on new products to expand our molecular diagnostics menu. Research and development expenses consist primarily of salaries and related personnel costs, material costs for assays and product development, fees paid to consultants, depreciation and facilities costs and other expenses related to the design, development, testing, (including clinical trials to validate the performance of our products) and enhancement of our products, and acquisition of technologies used in our products. Research and development costs are expensed as they are incurred. Research and development expenses for the three months ended March 31, 2008 were $6.2 million, compared to $5.1 million for the three months ended March 31, 2007. The increase in research and development expenses was primarily due to an increase in personnel and product development expense, including clinical trial costs incurred by us in pursuit of FDA pre-market approval for our HPV offerings.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist primarily of salaries and related personnel costs for our sales and marketing management and field sales force, commissions, office support and related costs, and travel and entertainment. Selling and marketing expenses for the three months ended March 31, 2008 were $3.5 million, an increase of $0.9 million, compared to $2.6 million for the corresponding period of 2007. The increase in selling and marketing expenses was due to an increase in personnel related expenses and marketing expenses, compared to the same period in 2007.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist primarily of salaries and related expenses for executive, finance and other administrative personnel, legal and professional fees, office support and depreciation. General and administrative expenses increased to $3.7 million in the three months ended March 31, 2008, from $2.9 million for the corresponding period in 2007. The increase in general and administrative expense was due to an increase in accruals related to our long-term incentive plans compared to the same period in 2007.
LITIGATION EXPENSE. Litigation expense consists of legal fees and other costs associated with patent infringement and other lawsuits. Litigation expense decreased to $0.3 million in the three months ended March 31, 2008 from $0.4 million in the corresponding period in 2007.
RESTRUCTURING AND OTHER CHARGES. In March 2008, the Company determined that the portion of its corporate office previously not utilized was needed for its operations. Therefore, in the first quarter of 2008, the restructuring balance of $0.5 million was adjusted.

INTEREST INCOME. Interest income for the three months ended March 31, 2008 and 2007 was $0.3 million and $0.5 million, respectively. The reduction in interest income is primarily due to the reduction in cash and short-term investments held during the first quarter 2008 compared to 2007.
INTEREST EXPENSE. Interest expense for the three months ended March 31, 2008 was $1.0 million compared to $0.3 million in the corresponding period in 2007. The increase in interest expense was due to the accrual and amortization of fees related to the credit facility entered into in December 2007.
OTHER INCOME (EXPENSE). Other expense for the three months ended March 31, 2008 was $26,000 compared to other income of $10.7 million for the same period in 2007. Other income in 2007 included $10.75 million from the settlement of patent litigation with the former Stratagene Corporation.
MINORITY INTEREST. Minority interest for the three months ended March 31, 2008 was $0.2 million, compared to $0.1 million in 2007. Minority interest represents Third Wave Japan’s minority investors’ share of the equity and earnings of the subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through private placements of equity securities, research grants from federal and state government agencies, payments from strategic collaborators, equipment loans, capital leases, product sales, convertible notes and an initial public offering. As of March 31, 2008, we had cash and cash equivalents and short-term investments of $28.9 million.
In April 2006, we raised $5.1 million from the sale of a minority equity investment in our Japan subsidiary. In May 2007 we raised an additional $5.3 million from the sale of additional minority equity investments in our Japan subsidiary. The proceeds from the equity investment are required to be used in the operations of our Japan subsidiary.
In December 2006, we sold $20,000,000 (at maturity) of Convertible Senior Subordinated Zero-Coupon Promissory Notes (the “Notes”) to an investor for total proceeds of $14,881,878 (the “Purchase Price”). The Notes will mature on December 19, 2011. The Notes do not bear cash interest but accrue original issue discount on the Purchase Price at the rate of 6.00% per year compounded semiannually (the Purchase Price plus such accrued original issue discount, the “Accreted Value”). So long as the Notes remain outstanding, we may not incur indebtedness other than certain Permitted Indebtedness, as such term is defined in the Notes.
The Notes are convertible at the holder’s option into shares of Third Wave common stock at a rate of 124.01565 shares per $1,000 of principal at maturity ($744 of Purchase Price) or a total of 2,480,313 shares. Pursuant to the securities purchase agreement under which we sold the Notes, in January 2007 we filed a registration statement with the Securities and Exchange Commission for resale of the shares of common stock issuable upon conversion of the Notes.
After December 19, 2008, if Third Wave common stock closes above $9.00 (150% of the initial conversion price) for 20 consecutive trading days, we may force the conversion of the Notes so long as there is an effective registration statement covering the Common Stock in place. At any time after December 19, 2009, we may redeem the Notes for an amount equal to their Accreted Value. If either an event of default occurs under the Notes (which would include failure to make any payments due under the Notes and certain defaults under other indebtedness) or a change of control occurs with respect to Third Wave, the holders of the Notes may put the Notes to Third Wave for a purchase price equal to 110% of their Accreted Value.
In December 2007, we entered into a five-year $25 million line of credit with a health care investment fund. We may borrow up to $25 million under the credit facility at an annual fixed interest rate of 7.75%. The credit facility matures in December 2012 at which time all outstanding loans are required to be paid. Interest on outstanding loans is payable quarterly. An annual 2% non-usage fee is assessed on any undrawn portion of the credit facility. The non-usage fee is payable quarterly. As of March 31, 2008, we had not drawn any funds under the credit facility. In consideration for providing the credit facility, we issued the lenders five-year stock warrants to purchase 1,815,000 shares of Third Wave common stock at a price of $8.36 per share. Pursuant to a registration rights agreement entered into in connection with the closing under the line of credit, in January 2008 we filed a registration statement with the Securities and Exchange Commission for resale of the shares of common stock issuable upon exercise of the warrants.
Net cash used in operations for the three months ended March 31, 2008 was $7.1 million, compared to net cash provided of $3.0 million in the corresponding period in 2007. The change was primarily due to the proceeds received from the settlement of patent litigation with Stratagene Corporation in 2007.
Net cash used in investing activities for the three months ended March 31, 2008 was $0.4 million, compared to $0.3 million in the corresponding period in 2007. Investing activities included capital expenditures of $0.2 million in the three months ended March 31, 2008 and 2007. Investing activities in the three months ended March 31, 2008 included the payment on license fee arrangements of $0.6 million compared to $0.2 million in 2007. In addition, net cash provided by investing activities included $0.4 million and $0.2 million from the purchases and sales or maturities of short term investments in the three months ended March 31, 2008 and 2007, respectively.
Net cash provided by financing activities was $0.4 million in the three months ended March 31, 2008 and 2007. Cash provided by financing activities in the three months ending March 31, 2008 and 2007 consisted of proceeds from the sale of common stock under the Company’s employee stock purchase plan and stock option plans of $0.5 million. In the three months ended March 31, 2007, $0.1 million was used to repay debt. Additionally, in the three months ended March 31, 2008 and 2007, $20,000 and $34,000 was used for capital lease obligations, respectively.
We believe that current cash reserves together with our ability to generate cash through operations, financing activities and other sources will be sufficient to support short-term and long-term liquidity requirements for current operations (including annual capital expenditures). However, we cannot assure you that our business or operations will not change in a manner that would consume available resources more rapidly than anticipated.
We also cannot assure you that we will not require substantial additional funding before we can achieve profitable operations. Our capital requirements depend on numerous factors, including the following:
- our progress with our research and development programs;

- the need to pursue FDA clearances or approvals of our products;

- our level of success in selling our products and technologies;

- our ability to establish and maintain successful collaborative relationships;

- the costs we incur in securing intellectual property rights, whether through patents, licenses or otherwise;

- the costs we incur in enforcing and defending our patent claims and other intellectual property rights;

- the need to respond to competitive pressures;

- the possible acquisition of complementary products, businesses or technologies; and

- the timing of capital expenditures.

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