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Summary

  • OraQuick HCV only FDA-approved test.
  • New legislation for baby boomer testing in New York serves as a major catalyst and sets up benefits from other states following lead.
  • At-home HIV test remains a game changer and offers market opportunity of over $500 million.

OraSure Technologies (NASDAQ:OSUR) may best be known for its at-home HIV test, but has an exciting entry into the HCV testing market. This newer area of focus for OraSure has huge prospects, with new international approvals and changes to healthcare requirements in the United States. This market, along with three other key drivers for OraSure continues to make this company undervalued.

During a presentation at the Citi Global Healthcare Conference, OraSure commented on its key drivers for 2014 and 2015. Listed below are the three key drivers for 2014 (OraQuick HCV, OraQuick HIV, DNA Genotek), and the one that will also help those three in 2015 (Thermo Fisher substance abuse partnership). Here is a summary and my take on how the company is getting closer to turning a profit.

OraQuick HCV

OraSure announced a new co-promotion agreement with AbbVie (NYSE:ABBV). The deal brings the two companies together on OraSure's OraQuick HCV Rapid Test in the United States. The test, meant for at-risk hepatitis C candidates is the only FDA-approved point-of-care test for the detection of the disease. The deal gives AbbVie exclusive promotion rights to the test in certain markets. Under the deal, OraSure will receive up to $75 million in exclusivity payments through the end of 2019.

There are over 5 million people with hepatitis C in the United States. Up to two-thirds of those infected go undetected and are unaware of their condition that could be diagnosed with better testing. This test from OraSure takes a blood sample and provides results in 20 minutes. The test is 98% accurate and has been well-received by doctors and hospitals. According to OraSure, the test is appropriate for public health offices, health clinics, physician offices, laboratories, and emergency rooms.

The opportunity for this diagnostic test of OraSure's has recently increased with new and pending legislation. The state of New York became the first state to pass a law where all "baby boomers" are offered a hepatitis C screening while they are at the doctor's or a hospital. According to the first-quarter earnings call, there are 10 other states with similar legislation that is currently pending.

To make matters better for OraSure, United Healthcare has already begun covering hepatitis C screening tests. Other insurance companies and Medicare/Medicaid might soon cover the testing as well. The New York healthcare site has more information, and does not list OraSure by name, but includes the test in the Frequently Asked Questions.

Obviously, this law has a huge effect on OraSure, as its test will now be marketed to more people. The state of New York has a large population of baby boomers, and this test provides quick, accurate results, which might make it the test of choice in doctor's offices and hospitals. Other states passing the legislation serves as a catalyst that could lead to share price increases or analyst upgrades.

The first quarter saw HCV sales increase. Seventeen percent of orders were from new customers, with the remaining being reorders. This shows the strength of the test, as more outlets are replenishing supplies. Several large international orders were also recognized in the first quarter.

OraQuick HIV

Since 2002, OraSure has sold more than 30 million of this test that diagnoses HIV in patients. These sales were to professionals, as OraSure became one of the most respected testing companies. In July 2012, OraSure saw its OraQuick In-Home HIV Test approved for use in the United States. This OTC test is the only FDA-approved HIV test on the market, and officially went on the market in the United States in October of 2012.

There are 1.2 million Americans that have HIV, a full 20 to 25% of those are unaware that they do. The OraQuick HIV test is available in over 30,000 stores nationwide, including CVS, Rite Aid, Walgreens, and Wal-Mart. OraSure has sold 300,000 units of the OTC HIV test since the launch.

In the first quarter, sales of the HIV OTC were $9.1 million. OraSure believes the U.S. OTC HIV market is worth $500 million, based on a $40 price point for its test. In the first quarter, OraSure posted revenue of $2 million from the OTC HIV tests, an improvement from the prior year's $1.4 million.

More importantly, the test continues to see increasing sales on a month-to-month basis. In fact, sales grew 6% from January to December, 9% from February to January, and 8% from March to February. Retail sales continue to improve, with an increase in shelving space. Growth could once again be on the horizon with a new display unit deal with Walgreens. OraSure shipped 1800 displays in March to Walgreens that will better showcase its product and place the OraQuick HIV in prominent locations. Prior stores with displays posted 2.5 times higher growth than stores not featuring the same display.

Another key driver for this particular product is international markets. The United Kingdom recently repealed a law that made the HIV testing done at home illegal. With that law repealed, OraSure could now be the direct winner. Other European countries still have the potential to approve the product, which could boost sales next year.

DNA Genotek

One of the biggest topics of the Citi Global Healthcare presentations was the company's DNA Genotek unit. Back in 2011, OraSure paid $53 million to acquire the company. The company is a market leader in the oral collection systems for molecular diagnostics.

The company has technology behind the DNA sequencing that is used by sites like 23andme.com and ancestry.com. The recent troubles for 23andme.com were a slight issue for OraSure, but the company reminded investors that that site represents less than 5% of total revenue.

Recently, sales increased 40% for DNA Genotek. The business segment saw revenue from commercial increase 80% and make up 53% of revenue. A new manufacturing line is close to full operation, which will significantly increase capacity of the Oragene product. In fact, production for the product could more than triple with the new line.

Thermo Fisher Partnership

OraSure plans on rolling out new assays in its substance abuse segment in 2014. The company made a point that this partnership with Thermo Fisher (NYSE:TMO) will be a key driver in 2015. This segment could push the company to a profit in 2015, if new items are released.

Back in November, I highlighted products in this partnership, including Intercept, which is the only FDA-approved product that detects nine of the biggest illegal drugs. This test is being shopped to criminal justice and forensics markets that could power sales of the substance abuse segment much higher.

Financials

In the first quarter, OraSure reported revenue of $23.5 million, an increase of 11%. Molecular collections was one of the biggest growth segments, with sales of $5.8 million, an increase of 46%. International sales improved, thanks to the HCV test.

Gross margins improved to 59%, from the prior year's 57%. In the second quarter, OraSure sees revenue hitting $25.2 to $25.7 million. OraSure is projecting a loss of $0.09 to $0.10 per share for the second quarter. The company ended the first quarter with $84.2 million in cash and no debt.

Turning a Profit

OraSure will not give guidance on when the company will hit a profit. I believe the company is fast approaching that day, and fiscal 2015 could be the year OraSure hits the black. One way the company is speeding up the process is through smarter advertising.

The company has spent a lot of money to promote its OraQuick HIV. This money was spent on endorsements and commercials to appeal to certain populations and demographics. While this was not a waste of money, the company believes it has a new approach with a more focused retail marketing approach, like the display units in Walgreens. In fact, in the third and fourth quarters, advertising on the product will drop to $1 million, a severe cut from prior quarters.

Analysts on Yahoo Finance call for a loss of $0.25 per share in fiscal 2014. This is on an estimated revenue increase of 5% to $103.6 million. In fiscal 2015, analysts see the company posting a loss of $0.09 per share. In 2015, revenue is estimated to rise 13% to $117.1 million. On OraSure's website, it lists its own analyst guidance. Seven analysts polled have an average target of a loss of $0.03 per share in fiscal 2015. In fiscal 2016, two analysts polled have an average of $0.19 in earnings per share estimates.

Back in November, I recommended buying shares of OraSure on the heels of the Thermo Fisher substance abuse deal. Since that time, shares are up 28% on the pickup of analyst upgrades and more news for this company. Since the beginning of 2014, the shares of OraSure have increased 16%. Over the last 2 years, shares are still down 27%. The company continues to trade at a market capitalization of under $500 million.

Conclusion

With the three key drivers this year and a total of four in 2015, I believe OraSure will post a profit for fiscal 2015. The company's new announcement of the deal with AbbVie furthers my bullish take on that test. I believe OraQuick HCV has a huge market opportunity, even greater than the at-home HIV test. Together, these two tests are huge game changers for these two horrible diseases.

OraSure has a market capitalization of under $500 million. While this seems reasonable or high compared to annual sales of $100 million, this company is about to break free. Investors should be ready to get involved in this small cap stock and prepare for the future opportunities in store. This stock won't be under $10 for long.

Source: OraSure Technologies: HCV Opportunity Huge, Enhances 4 Key Drivers For 2014 And 2015