OraSure Undervalued With New Thermo Fisher Substance Abuse Deal And Continued HIV At-Home Testing

| About: OraSure Technologies, (OSUR)
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On Thursday, OraSure Technologies (NASDAQ:OSUR) made two announcements that briefly sent shares above the $7 range. The company ended one agreement and started a new one. The newly announced deal should be getting more coverage and is a great reason to begin a long position in this diagnostic small-cap.

OraSure Technologies and Roche (OTCQX:RHHBY) have terminated their assay collaboration. Under the new terms, Roche will continue to supply certain items for OraSure going forward for five FDA-cleared assays. The supply contract will run for five years. Due to the termination, Roche will pay OraSure $8.3 million. There is the potential for up to an additional $5.5 million in payments to OraSure depending on terminations down the road.

Shortly after announcing its termination with Roche, OraSure announced terms of a new deal with partner Thermo Fisher Scientific (NYSE:TMO). The new development and supply deal between the two parties centers around 12 homogeneous fully automated oral fluid drugs of abuse assays. OraSure's new Intercept collection device will be the center of this partnership. OraSure's chief executive officer Douglas A. Michels said, "We look forward to adding a complete menu of fully automated oral fluid drug assays to our customer offerings beginning in 2014."

In the second half of 2014, OraSure plans on launching its Intercept device to domestic criminal justice and forensics markets. This is one of the key reasons investors should get into the stock now. Intercept has the potential to change the market and create the biggest revenue stream for OraSure yet. Intercept is the only FDA cleared device to detect nine abused drugs. The drugs the machine can test include:

· Marijuana, amphetamines, PCP, cocaine, opiates, methamphetamine, barbiturates, methadone, benzodiazepines

The opportunity here is huge for OraSure for its substance abuse detection. Workplaces and courtrooms continue to need testing for people. With the Intercept, tests for nine drugs can be performed at once, eliminating additional testing costs for companies and the public sector. In the third quarter, substance abuse related revenue was only $2.1 million. This represented less than 10% of overall sales and was well shy of the leading sector, infectious diseases, which saw revenue of $12.9 million. The infectious disease category is being led by a HIV and HCV test readily available. When Intercept begins going on sale in 2014, this business segment has the potential to be where infectious diseases is now, posting double-digit million dollar revenue for the company.

Back in June 2012, OraSure had its over-the-counter HIV approved by the FDA. The company started selling the device in the fourth quarter of 2012. The OraQuick In-Home HIV test is a game changing product for OraSure. The new test furthers the strength of OraSure's HIV testing that it has powered hospitals and doctors with for years. In professional markets, OraSure has sold over 25 million OraQuick devices. In 2012, the at-home device was named one of Time Magazine's "Best Inventions of 2012". Surprisingly enough, the original professional OraQuick test made the "Best Inventions of 2004" list from the same magazine.

There are several positive catalysts for this under a year old device for OraSure. One of the biggest growth drivers will be OraSure's promotional and advertising in the fourth quarter for OraQuick In-Home. The company plans on spending $5.6 million in the fourth quarter with an aim at key demographics like African-Americans and homosexual males. The company has launched a key advertising platform with celebrity spokespeople Magic Johnson, Ross Mathews, and Dr. Rachel Ross. The OraQuick In-Home will be featured in commercials on channels like BET and Logo. To me, this is one of the key drivers for OraSure as the company needs to create awareness for its at-home device. Customers need to know how easy the test is, where they can buy one, and why they should trust it.

Another catalyst for investors is the company's changing of its revenue recognition. Currently OraQuick revenue is deferred, but OraSure is considering changing this to better account for sales of the devices. This change may take place as early as the fourth quarter. The company believes this change could increase quarterly revenue by as much as $2 million. This would essentially increase quarterly revenue by 10% without actually adding extra sales. The recognition change would help investors and analysts better value the sales of the company's products. I believe this change would get the company to a break-even profit point sooner than analysts currently forecast.

In the third quarter, OraSure posted a record high $24.7 million in revenue. Total revenue was up 12% for the quarter, led by several categories that had double digit growth. Here is a look at key revenue figures for business segments:

· Molecular Collection: $5.0 million, +48%

· Infectious Diseases: $12.9 million, +20%

· Cryo: $3.6 million, -17%

· Substance Abuse: $2.1 million, -10%

International sales increased nicely in the third quarter. The company's international HIV sales were up 31%, while the HCV segment saw an increase of 283%. The revenue figures of $1.2 million and $924,000 respectively made up almost 9% of total company sales in the quarter.

On February 3rd, OraSure will report fourth quarter earnings. The company had originally forecasted a loss of $0.07 to $0.08 in the last quarter of the year. With the payment from Roche, OraSure is now forecasting a positive earnings per share of $0.07 to $0.08 for the fourth quarter. Analysts on Yahoo Finance expect OraSure to post a loss of $0.39 per share in the current fiscal year. In fiscal 2014, OraSure is expected to post a loss of $0.29 per share. I believe the company can improve on these expectations and come closer to posting a profit per share in fiscal 2014 or fiscal 2015. Revenue is expected to grow only 8% in fiscal 2014. I believe the company can post double digit revenue growth as it launches several new tests, grows international sales, and continues to push the sales of its innovative OTC HIV test.

Shares of OraSure shot up over 8% on Thursday from the announcement. The jump could have been from the new deal with Thermo Fisher, or it could have been OraSure shifting fourth quarter guidance to positive earnings per share. Either way, the 8% jump was not enough in my opinion. I believe shares are headed for new highs as the stock pushes above $8 soon. This small company is only getting started and investors should consider riding along with OraSure.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in OSUR over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.