By Jake King
As investors packed up in search of more exciting prospects, shares of OraSure Technologies (OSUR) have been slashed in half since their highs in mid-2012, in fact, setting a new 52-week low this month. OraSure received approval for the first in-home HIV diagnostic last June (called OraQuick In-Home HIV), a product that Magic Johnson called a game-changer and one that biotech enthusiasts, in the preceding months, latched on to with fervor. But OraSure, with the approval and commercial launch in the rear-view, has quickly become an execution-centric "show me" story without regulatory or clinical catalysts to keep speculative biotech investors intrigued. OSUR now trades at 3.36x estimated 2013 revenues, and even if the business shows no growth this year -- unlikely given that OraQuick In-Home HIV launched just six months ago -- the stock is undervalued. Expectations have been falling as the newly launched product just didn't take off as quickly as hoped. Now, management has guided for 1Q13 revenues to fall sequentially from 4Q12 by 10%, to ~$20M, which, if the company has guided low enough, may be setting OSUR up for an earnings beat in the first quarter.
The stock has become interesting now that its value has fallen by half. Analysts expect that the demand for an in-home HIV test is there, and the market for infectious disease testing as a whole should grow based on recommendations from key medical organizations. OSUR has been an abysmal performer since last July, however, we believe the stock is now attractively priced for a nibble, and downside from here is limited. If analysts are right about growth of the company's OraQuick In-Home HIV test, as well as OSUR's OraQuick HCV test (for hepatitis C), the stock could get back to the double digit range in time; the 12-month average price target from Wall Street is $11.07 according to Yahoo! Finance.
OraSure's full product line is a backdrop to its OTC HIV test, the first of its kind.
OraSure develops and markets oral fluid, blood, serum and urine diagnostic products, primarily for the detection of infectious diseases; specimen collection devices (for insurance purposes); and medical devices used in the removal of benign skin lesions (cryosurgery). The diagnostics, which are used in both Point-of-Care (hospitals, physician's offices) and lab settings, make up approximately 70% of OraSure's revenues. They leverage the company's oral-fluid technology as a non-invasive alternative to traditional testing methods requiring blood or urine. A mouth swab is all it takes for a collection, and results are available within 20 minutes according to the company. But most interesting, and the focus of the Street, is the company's OraQuick In-Home HIV test, which was approved in June of 2012 as the first Over-The-Counter (OTC) diagnostic for HIV testing. OraSure has developed a ground-breaking technology, but the company needs to prove that it can execute on commercialization before investors give it credit as a growth story. The product launched in October and has since demonstrated a shallower sales ramp than expected, thus the company's declining share price. The in-home test is available in 30,000 retail outlets like CVS (CVS), Walgreens (WAG), and Wal-Mart (WMT), but because it has only had a brief time on store shelves (six months), OraSure recognized sales of just $.5M in 2012. In the mean-time, analysts expect OSUR's smaller molecular diagnostics and cryosurgical businesses to demonstrate flat- or no-growth in the near-term, despite a year-over-year revenue increase in 2012. For now, the OraQuick HIV and HCV diagnostics are in the spotlight, and expected to drive revenue growth for the company. Interestingly, analysts are estimating 10.3% revenue growth this year, accelerating to 19.8% top-line growth in 2014. If these consensus expectations are met, this demonstrates an attractive growth story, and one in which the market will pay a premium. Additionally, if shares of OSUR continue to trade at just over 3x revenues and growth estimates look achievable, the company could become a prime acquisition target for larger medical diagnostic-driven companies. Some Wall St. analysts are already speculating on this kind of outcome for OSUR.
Differentiation and segment-wide influences should spur adoption of HCV and HIV tests. Overall, the OraQuick line is well-differentiated, and we expect to see continued organic growth of the product line, particularly the recently approved in-home HIV diagnostic. The company's unique oral fluid-based diagnostics technology is a major differentiating factor in the point-of-care (POC) diagnostics market, where many of the tests still require a blood sample. In addition, the rapid turn-around on the test's results is a plus for adopters. Of course, the company's marketing efforts will be a driving force behind adoption. Late last year, after initiating a national TV advertising campaign, OraSure saw that: "weekly consumer sales during December grew 30% over the comparable levels in November. In January, we increased the frequency of our TV spots and consumer sales were up 40% over December." OraSure plans to drop another $7.3M into their direct-to-consumer advertising campaign in 1Q13. But on top of growth via company advertising, there are a number of other consumer awareness measures that could spur HIV and HCV testing across the board. Earlier this month, the New England Journal of Medicine (NEJM) ran an article titled "Routine HIV Testing, Public Health, and the USPSTF - An End to the Debate" which says that the U.S. Preventive Services Task Force (USPSTF) should soon be releasing recommendations on screening for HIV infection (a possibility that the company has noted). Importantly, the Affordable Care Act (ACA) mandates that all public and private health plans provide coverage for USPSTF-recommended preventative services, without patient co-payments, thus, this recommendation, and the CDC's stance, would be a significant value-driver for OraSure. With regard to the company's OraQuick test for HCV, in 2012, the Centers for Disease Control (CDC) recommended that anyone born between 1945-1965 should be tested for hepatitis C (HCV). The CDC estimates that one-time HCV testing of all baby-boomers could prevent more than 120,000 deaths and detect 800,000 undiagnosed cases of hepatitis. There are an estimated 3.2M people in the U.S. infected with HCV, and with newer, oral treatment alternatives expected in the near-term -- think Gilead (GILD), Achillion (ACHN), and Vertex (VRTX) -- the identification of HCV patients is expected to accelerate.
Even conservative growth justifies a higher valuation. OraSure reported revenue of $87.8M in 2012: $37.9M from the company's HIV testing line ($.5M from the in-home product) and $3.9M from its HCV diagnostics. For reference, the company generated $14.9M from the cryosurgical franchise, $14.3M from molecular collection systems, and $9.4M from substance abuse products, but these tests are not expected to grow. More telling, however, was OraSure's guidance for $20-21M in net revenue and a net loss of approximately $0.18 -$0.19 per share for 1Q13, which was unexpectedly down from 4Q 2012's reported $22M in revenues and loss per share of $0.11. With the lowering of expectations, the company noted that the first quarter is traditionally its worst, and the fourth quarter is generally its best. In addition, the company admitted that it saw "somewhat higher than expected Q4 2012 buying from our domestic professional cryo distributors in advance of a price increase that took effect in early January 2013." In other words, the advanced buy in of that product line (cryosurgicals) will come out of the first quarter's performance.
First quarter guidance suggests an annual revenue run-rate for the company at more-than $80M to $84M (1Q is the worst quarter of the year, and will have a lower cryosurgical contribution). Using a 4x multiple on the low end of this conservative revenue range indicates that the downside is limited for OSUR, given its current market cap of $322M. And if the company can do better in 1Q and show strong growth trends for its OraQuick HIV and HCV tests, OSUR will start to move off of these trough levels. As stated above, analyst estimates call for a respectable 10.3% growth this year, accelerating to over 20% growth next year, with the HIV and HCV tests growing significantly and OSUR's other business segments remaining relatively stable. Analysts are calling for 2013 revenues of $97M, thus OSUR currently trades at 3.36x 2013 revenues, and with estimates for revenue of $115M in 2014, the company trades at just 2.8x forward revenue expectations. With sales expected to double over the next few years, it's only a matter of time before OraSure achieves profitability (the company expects gross margins in the upper 50% range). Positive net income should materialize in 2015.
The addressable market could be expanding as fast as the product. With the recent announcements from the CDC and the possibility for the USPSTF to make a material recommendation for HIV testing, the addressable market for OraSure's HIV and HCV products is likely to grow faster than initial estimates. Current estimates call for the U.S. OTC HIV test market to reach $300-500M, and we note that just 10% penetration into this market opportunity substantially increases OSUR's revenue and growth prospects. For the HCV testing market, estimates are for $500M annually in the U.S., but with the new guidelines, the full potential market based on adults born before 1964 could actually be valued at over $1B. OraSure hopes to partner its HCV POC test, for which an announcement could send shares higher considering the stock's current price. It's also worth noting that OraSure ended 2012 with $87.9M in cash and less than $17M in debt. The company used $5.4M for operating activities last year, and although we expect that number to increase substantially this year as marketing efforts ramp up, the company should be able to reach profitability in the next two years without further capital requirements.
Overall, OraSure has become more attractive at current share prices, with limited downside based on a base-case, no-growth scenario. Even modest penetration of the large addressable HIV and HCV testing markets holds meaningful value for this emerging diagnostics company.
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