A financially fruitless quarter is never good news for investors, but is the market being a wee bit myopic when it comes to OraSure's long-term potential? What are the pros and cons to investing in this emerging biotech stock?
HIV testing away from the clinic
First of all, this quarter wasn't actually that bad. The company's total revenue increased by almost 20% compared to the same quarter last year, but a 60% increase in marketing, sales, general, and administrative expenses devastated the bottom line. OraSure reported a net loss of $3.6 million this quarter, which was reminiscent of its first-quarter loss of $3.3 million.
The ballooning sales and marketing expenses were related to the October launch of the OraQuick In-Home HIV test. OraQuick is a huge step forward for public health: It identifies antibodies in mouth fluids, can be done entirely at home, and results are attained in under a half hour.
An over-the-counter HIV test produced by private company Home Access Health is already available, but it involves sending a blood sample to a laboratory and it takes at least a day to receive the result.
OraSure CEO Douglas Michel revealed in the latest earnings call that OraQuick's suggested retail price will be $39. Based on prices from Drugstore.com, this is up to almost $21 less than Home Access Health's HIV tests.
But how big will the market be for at-home HIV testing?
In its 10-Q SEC filing, OraSure stated that its customers are "expected to be comprised primarily of young, sexually active adults, with greater purchase intent found in high-risk sub groups, such as men who have sex with men, African Americans and Latino Americans." Based on these projections, the company predicts OraQuick sales of $500 million each year.
This figure, however, must be taken with a grain of salt, and it is important to distinguish between sales predictions from diagnostic and pharmaceutical companies. Let's say a company discovers a new drug for a serious disease that afflicts 1 million people. If all of these patients have access to health care and the disease is life-threatening, then 100% of these patients are likely to buy the drug. Diagnostic sales, however, largely depend on human behavior. Many clinics already provide free HIV testing, and there is no guarantee that at-risk populations will actually buy the test or want to discover their HIV status.
OraSure has benefited from a lot of free publicity recently. OraQuick's over-the-counter FDA approval in July was a leading story on virtually every news source in the country. Other events, such as National HIV Testing Day, the International AIDS Conference, and the FDA approval of Gilead's
Patients who take Truvada, a drug that can now be used to prevent HIV infections, are generally at high risk of contracting the disease and have to be tested frequently. OraSure's kit will be the easiest testing option come October, providing another opportunity for the company.
Push for more hepatitis C testing
OraSure is banking on the success of its over-the-counter HIV test, but sales from its Hepatitis C virus diagnostic products could also grow this year. Hepatitis C can take decades to show symptoms, and many adults subsequently never get tested for the disease. The Centers for Disease Control and Prevention recently announced National Hepatitis C Testing Day, and is encouraging all baby boomers to get tested.
The recent approval of hepatitis drugs like Vertex's
Do you want to invest in this company?
OraSure's HIV test could be a market flop, but the company's solid financial situation mitigates the investment risks. It has $23.3 million in cash, little long-term debt, and only burned about $3 million last quarter. As the sales and marketing expenses for its new HIV test decrease, and a new revenue stream from the tests improves the company's top line, I expect OraSure to be a good long-term investment. I've given this company an outperform rating on my Motley Fool CAPS page for these reasons.
OraSure could be an interesting growth story to follow, but it's important to balance your portfolio with solid dividend stocks. If you're looking for some good investments, check out the stocks that our analysts recommend in this free report: "3 Dow Stocks Dividend Investors Need."
Fool contributor Max Macaluso holds no position in any company mentioned. Motley Fool newsletter services have recommended buying shares of Vertex Pharmaceuticals and Gilead Sciences. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.