OraSure Not That Sure

Diagnostics company OraSure Technologies (Nasdaq: OSUR  ) recently won FDA approval for its rapid oral-fluid HIV antibody test. The breakthrough is significant, with an estimated 40 million people harboring the virus without knowing it.

The oral test is fast and, unlike a blood test, which requires a trained technician (and has its own set of associated safety and cost issues), can be administered virtually anywhere with minimal cost, training, or safety issues. Speed and ease of use are a winning combination.

As Jeff Hwang noted in December, the OraSure rapid HIV test has been available since Nov. 2002 for finger-stick whole blood. That test was upstaged in December when Trinity Biotech (Nasdaq: TRIB  ) received FDA approval for a 10-minute, one-step test for HIV in human serum, plasma, and whole blood. The oral-fluid test is another step forward.

Still, investors need to weigh two factors. First, the test is only approved for detecting the more common HIV-1 antibodies. True, the less common HIV-2 is most prevalent in western Africa, but if you are going to test (or be tested), don't you want to test for both? Second, the company still needs to license HIV-2 patents held by Bio-Rad (AMEX: BIO  ) . Although, it is likely these patents will be nonexclusively licensed, it's an uncertainty that could spell problems.

First Call analyst estimates are available through 2008. Even with a mean five-year growth rate of 19%, earnings are expected to reach just $0.36 a share by year-end 2008. After today's 10% gain, the company sells at 30 times projected 2008 earnings. Rapidly growing rival Biosite (Nasdaq: BSTE  ) sells for 20 times trailing earnings, and much larger Dade Behring (Nasdaq: DADE  ) sells for 38 times trailing earnings.

The company's pipeline is interesting, however. Although the FDA has asked for more data on an oral test for cocaine, opiates, amphetamine/methamphetamine, PCP, and marijuana, the company will launch the product into the European "roadside testing market" in April. You can bet that police would rather test oral fluids than urine, not to mention get back the results in a flash.

Salivating to own OraSure? Given the earnings outlook, you might check what happened to Trinity Biotech after its quick news-induced jump to $6.72 on Dec. 30. It closed Friday at $3.70 a share. Good news is great, but strong revenue and earnings growth and growing free cash flow ultimately win out.

Interested in discussing diagnostic companies with other investors? Try The Motley Fool's OraSure or Biosite discussion boards.

Fool contributor W.D. Crotty does not own any of the stocks mentioned.