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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-K
(Mark one)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2000
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ________
Commission File No. 1-10492
ORASURE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-4370966
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
150 Webster Street
Bethlehem, Pennsylvania 18015
(Address of principal executive offices) (Zip code)
(610) 882-1820
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.000001 par value per share
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant, as of March 16, 2001: $176,268,488
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 16, 2001: 36,502,385 shares.
Documents Incorporated by Reference:
Portions of Registrant's Definitive Proxy Statement for the 2001 Annual Meeting
of Stockholders are incorporated by reference into Part III of this Report.
TABLE OF CONTENTS
PART I
Page
ITEM 1. Business 1
ITEM 2. Properties 22
ITEM 3. Legal Proceedings 23
ITEM 4. Submission of Matters to a Vote of Security Holders 23
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters 23
ITEM 6. Selected Financial Data 23
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 25
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 34
ITEM 8. Financial Statements and Supplementary Data 34
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 34
PART III
ITEM 10. Directors and Executive Officers of the Registrant 35
ITEM 11. Executive Compensation 35
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 35
ITEM 13. Certain Relationships and Related Transactions 35
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on 35
Form 8-K
Statements contained in this Annual Report on Form 10-K regarding future events
or performance are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company's actual results
could be quite different from those expressed or implied by the forward-looking
statements. Factors that could affect results are discussed more fully under the
Sections entitled "Forward-Looking Statements" and "Risk Factors" in Item 1 and
elsewhere in this Report. Although forward-looking statements help to provide
complete information about the Company, readers should keep in mind that
forward-looking statements may not be reliable. Readers are cautioned not to
place undue reliance on the forward-looking statements.
PART I
ITEM 1. BUSINESS.
On September 29, 2000, STC Technologies, Inc., a Delaware corporation ("STC"),
and Epitope, Inc., an Oregon corporation ("Epitope"), were merged (the "Merger")
into OraSure Technologies, Inc. ("OraSure Technologies" or the "Company"), a new
corporation that was organized on May 5, 2000 under Delaware law solely for the
purposes of combining STC and Epitope and changing the state of incorporation of
Epitope from Oregon to Delaware. The companies were merged pursuant to an
Agreement and Plan of Merger, dated May 6, 2000 (the "Merger Agreement"), by and
among Epitope, STC and the Company. The stockholders of STC and Epitope approved
the Merger Agreement on September 29, 2000.
The Merger was structured as an all-stock transaction valued at $260 million. As
a result of the Merger, (i) each share of STC common stock was converted into
the right to receive five and two hundred ninety-six one thousandths (5.296)
shares of the Company's Common Stock and (ii) each share of Epitope common stock
was converted into the right to receive one share of the Company's Common Stock.
The Merger has been accounted for as a "pooling of interests."
The Merger is expected to leverage the Company's expertise in oral fluid
technology, infectious disease testing and substance abuse testing. By building
upon the complementary product portfolios, technologies and sales
infrastructures of Epitope and STC, the Company intends to open up new markets
in the United States and other countries and strengthen its position in key
markets such as the rapidly expanding point-of-care market. In particular, the
proprietary up-converting phosphor technology contributed by STC has broad
applications for oral fluid testing. With the increased sensitivity and accuracy
of this technology, the Company believes it can continue to expand the menu of
tests available for oral fluid point-of-care testing. This same basic technology
is also expected to be of significant benefit to other medical diagnostic
manufacturers outside the expertise contributed by Epitope and STC. For many of
these additional applications, OraSure Technologies plans to license these other
companies to provide an ongoing revenue stream of license fees and royalties.
PRODUCTS
OraSure Technologies develops, manufactures and markets oral fluid specimen
collection devices using its proprietary oral fluid technologies, proprietary
diagnostic products including in vitro diagnostic tests, and other medical
devices. These products are sold in the United States and certain foreign
countries to public and private-sector clients, clinical laboratories, physician
offices, and hospitals, and for workplace testing.
OraSure Technologies' business focuses on the following principal platform
technologies: (1) the OraSure(R) oral fluid collection device, (2) the
OraQuick(R) rapid diagnostics test device, and (3) the new up-converting
phosphor technology ("UPT"), including its first application, UPlink(TM), a
lateral flow testing system for various analytes. In addition, the Company sells
certain other products, including the Histofreezer(R) cryosurgical system,
certain immunoassay tests and reagents for insurance risk assessment and
forensic toxicology applications, an oral fluid Western Blot confirmatory test
for HIV-1, and the Q.E.D. (R) Saliva Alcohol Test.
OraSure(R) Collection Device
- ----------------------------
The Company's OraSure oral fluid collection device is used in conjunction with
screening and confirmatory tests for HIV-1 antibodies and other analytes. The
OraSure device consists of a small, treated cotton-fiber pad on a nylon
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handle that is placed in a person's mouth for two minutes. The device collects
oral mucosal transudate ("OMT"), a serum-derived fluid that contains higher
concentrations of antibodies than saliva. As a result, OMT testing is a highly
accurate method for detecting HIV infection and other analytes. The Company
believes that oral fluid testing has several significant advantages over blood
or urine-based testing systems for both healthcare professionals and individuals
being tested, including eliminating the risks of needle-stick accidents,
providing a noninvasive collection technique, requiring minimal training to
administer, providing rapid and efficient collection in almost any setting, and
eliminating the cost of a trained healthcare professional to administer.
The Company has received clearance from the U.S. Food and Drug Administration
("FDA") to sell the OraSure oral fluid collection device to professional markets
for use with a laboratory-based enzyme immunoassay ("EIA") screening test for
HIV-1 antibody detection. HIV-1 antibody detection using the OraSure collection
device involves three steps: (1) collection of an oral fluid specimen using the
OraSure device, (2) screening of the specimen for HIV-1 antibodies at a
laboratory with an EIA screening test, and (3) laboratory confirmation of any
positive screening test results with the OraSure Western Blot confirmatory test
(described below). A trained healthcare professional then conveys test results
and provides appropriate counseling to the individual who was tested. The
Company has also received clearance for use of the OraSure collection device
with EIAs to test for cocaine and for cotinine (a metabolite of nicotine) in
oral fluid specimens.
The Company markets the OraSure collection device in the insurance market for
the screening of life insurance applicants for HIV-1, cocaine and cotinine, and
in the physician office and public health markets for HIV-1 testing.
A collection device substantially similar to the OraSure device is included as
part of the Company's Intercept(TM) oral fluid drug test service. The Company
has received FDA clearance to use the Intercept collection device with EIAs to
test for drugs of abuse commonly known as the NIDA-5 (i.e. cannabinoids
(marijuana), cocaine, opiates, amphetamines, and phencyclidine ("PCP")) and for
benzodiazepines, barbiturates, and methadone. Intercept was launched for the
workplace testing, public health, criminal justice and drug rehabilitation
markets in February 2000. In 1999, the Company entered into an exclusive
agreement with LabOne, Inc., pursuant to which the Company agreed to exclusively
sell, and LabOne agreed to exclusively purchase and distribute, Intercept
collection devices and associated reagents for drugs-of-abuse testing in the
workplace testing market in the United States and Canada. Under the agreement,
LabOne provides all laboratory services necessary to test oral fluid specimens
collected by customers including screening and confirmatory studies. The term of
the agreement runs until December 31, 2002, with automatic yearly renewals
unless either party gives notice at least 180 days prior to the end of the
then-current term.
The Company believes that the Intercept service has several advantages over
certain competing products for drugs-of-abuse testing, including its
non-invasive nature, the ease of maintaining a chain-of-custody without
embarrassment to the person being tested, and the lack of requirement for
specially prepared collection facilities. The availability of an oral fluid test
is intended to allow workplace administrators to test for impairment on demand,
eliminate scheduling costs, and streamline the testing process.
OraQuick(R)
- --------
The OraQuick device is the Company's recently developed rapid test designed to
test an oral fluid, whole blood or serum/plasma sample for the presence of
various antigens. The device includes a porous flat pad used to collect an oral
fluid specimen. After collection, the pad is inserted into a vial containing a
pre-measured amount of developer solution and allowed to develop. When whole
blood, serum or plasma is to be tested, a loop collection device is used to
collect the sample and mix it in the developer solution, after which the
collection pad is inserted into the solution. The specimen and solution then
flow through the testing device where test results are observable in
approximately 20 minutes. No laboratory-based EIA is required, as the OraQuick
test is visually read shortly after the specimen is collected.
The first product utilizing this technology is the OraQuick HIV-1/2 device, a
rapid test for the presence of antibodies against HIV-1 and HIV-2. On June 23,
2000, the Company received approval for an Investigational Device Exemption
("IDE") from the FDA authorizing the commencement of formal clinical trials for
the OraQuick HIV-1/2
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device. Clinical trials in the United States are underway, although the Company
has experienced difficulty in recruiting a sufficient number of known positive
subjects. Due to the critical need for an FDA-cleared rapid HIV test, the
Company, after consultation with the FDA and the Centers for Disease Control and
Prevention ("CDC"), has decided to submit an initial application for FDA
clearance for testing of whole blood, serum and plasma during the second quarter
of 2001. This decision was based on OraSure Technologies' belief that a whole
blood clinical trial could be completed more quickly than one involving oral
fluid. The Company is continuing its oral fluid clinical trials and expects to
submit an application for FDA clearance of oral fluid tests during the third
quarter of 2001.
The Company has received approval from the CDC to use the OraQuick HIV-1/2 test
in a CDC-sponsored IDE. The CDC has identified several key areas for use of the
OraQuick HIV-1/2 device in the IDE, including certain public hospitals in five
U.S. metropolitan areas with relatively high HIV sero-prevalence among pregnant
women, AIDS service organizations, community-based organizations, outreach
programs, and selected hospital emergency departments and outpatient clinics. At
the CDC's Rapid Diagnostic's Meeting in February 2001, the CDC released the most
recent results of its ongoing multi-product, rapid HIV test study. These results
indicated a 100% sensitivity and 99.5% specificity for the OraQuick device with
whole blood samples.
In July 2000, the Company introduced the OraQuick HIV-1/2 device for sale
outside the United States at the International AIDS Conference in Durban, South
Africa. Clinical tests for the OraQuick HIV-1/2 device have been completed in
Thailand, with the results demonstrating 100% sensitivity and 99.9% specificity.
The Company intends to market the OraQuick HIV-1/2 product in the hospital,
physician office and public health markets focusing initially on international
markets. The Company recently entered into an agreement for the distribution of
the OraQuick HIV-1/2 device in Sub-Saharan Africa, with $5 million in revenues
expected from minimum quantities required to be purchased under the agreement
during the first year. Distribution agreements have been entered into or are
being pursued in numerous other countries.
The Company may need to obtain licenses or other rights under, or to enter into
distribution or other business arrangements in connection with, certain HIV-2
and lateral flow patents, some of which have been obtained, in order to market
the OraQuick HIV-1/2 device in the United States and certain other countries.
See the Section entitled "Risk Factors - Patent Issues Affecting OraQuick" for a
further discussion of these issues.
UPT(TM)and UPlink(TM)
- -----------------
UPT(TM) Technology. UPT is a proprietary label detection platform being
- -------------------
developed by the Company that uses phosphor particles to detect minute
quantities of various substances such as drugs, proteins, and DNA. UPT is based
on the use of a unique patented technology which is used to detect the presence
of specific substances in tests designed by the Company. UPT utilizes the same
particle shell that is coated onto a television screen, but the internal
chemistry of the particle has been changed. These changes result in a particle
that is excited by infrared light as compared to an ultraviolet light source for
television. OraSure Technologies and its research partners have developed
phosphorescent particles that up-convert infrared light to visible light, which
the Company is using to develop several applications.
Phosphor particles have been used for decades in television screens and in
fluorescent light bulbs. When ultraviolet light strikes the phosphor-coated area
in a screen or bulb, it excites the particles and colored light is produced. The
Company's patented improvements on this base technology employ chemical changes
inside the phosphor particles so that infrared light can be used to produce a
colored signal. This use of infrared light to create a colored signal is called
up-conversion as opposed to down-conversion, which occurs in phosphors designed
to be used with ultraviolet light.
The use of infrared light to excite the phosphor particles and produce a colored
light signal creates an important competitive advantage for the technology in
biological systems, especially human clinical diagnostics. Existing enzyme or
fluorescent-based assays employ visible or ultraviolet light to generate the
signals from the enzyme substrate or fluorescent molecules used as reporter
signals in these systems. The disadvantage of using light in the
3
visible or ultraviolet portion of the spectrum is that often molecules in
the cells or samples for analysis can also produce colored light (background
interference) from these excitation sources. When this occurs, a non-specific
signal is generated which dilutes or obscures the signal of interest for the
diagnostic test being administered. Because up-conversion does not occur in
nature, biological samples and specimens will not produce light, and therefore,
will not cause background interference when excited by infrared light.
The Company believes that UPT overcomes some of the limitations of other
diagnostic detection methods and offers features not commercially available
today. The fact that UPT testing produces zero background interference
dramatically increases the potential sensitivity of any test system. UPT
particles also offer the following other key competitive features:
o Ability to detect biological markers for several substances simultaneously
o Stability in a variety of biological specimens
o A permanent test record not subject to fading
o Applicability to a variety of instrument platforms
o A low-cost detection method that is easy to use
o Compatibility with alternative testing matrices such as oral fluid,
blood or others
o Ability to miniaturize the test platform
The Company has reached important milestones in the development of UPT,
including improving the manufacturing process to produce UPT particles, working
to optimize UPT particle coating techniques, producing four distinct colors of
UPT particles to begin experiments on the simultaneous detection of multiple
biological markers to permit multiplexing, demonstrating initial feasibility for
the use of UPT particles in drugs-of-abuse, infectious disease, cancer, and
limited DNA detection applications, and developing a UPT collector, test
cassette and reader for a variety of applications.
UPlink(TM). UPlink is the Company's first product application based on UPT.
- ----------
UPlink is designed to be a rapid, point-of-care system utilizing a collector,
lateral flow test cassette, and reader, which provides instrument-read
quantitative results in about 10 minutes on a variety of samples, including
without limitation oral fluid, blood, serum, urine and stool samples.
In March 2000, the Company signed a research and development agreement with
Drager Sicherheitstechnik GmbH ("Drager"), a European manufacturer and supplier
of medical and safety technology products for health care and industrial
applications, to develop and optimize the UPlink system for rapid detection of
drugs of abuse in oral fluid. The UPlink system developed with Drager is
expected to be marketed to law enforcement officials as a system for rapidly
assessing whether a subject is under the influence of one or more drugs of
abuse. As part of the research and development agreement, the Company received a
non-refundable fee and will receive additional fees upon achievement of
technical milestones. Upon successful completion of such research and
development activities, Drager has the option to become the Company's exclusive
worldwide distributor of the UPlink drugs-of-abuse test cassette and reader
developed under the research and development agreement to law enforcement
officials for use in rapidly assessing whether a subject is taking one or more
drugs-of-abuse substances.
In December 2000, the Company submitted an application for 510(k) clearance from
the FDA for its UPlink reader and three oral fluid drugs-of-abuse assays -
cocaine, opiates and amphetamines. A similar application for two additional oral
fluid assays -marijuana and PCP - is expected to be submitted to the FDA during
the second quarter of 2001. The Company expects to commence commercial sales of
UPlink for oral fluid drugs-of-abuse testing in the second half of 2001.
In September 2000, OraSure Technologies signed a research and development
agreement with Meridian Bioscience, Inc. (formerly Meridian Diagnostics, Inc.)
("Meridian"), a fully integrated medical diagnostics company. Under this
agreement, the Company and Meridian plan to develop a broad range of UPlink
point-of-care tests for the rapid detection of parasites, and gastrointestinal
and upper respiratory diseases. Pursuant to a related supply agreement, Meridian
will distribute worldwide the readers and lateral flow cassettes developed under
the research and development agreement. The Company will receive payments upon
achievement of certain milestones and royalties from the sale of the readers and
testing devices. OraSure Technologies has commenced work on the development of
4
two tests under the research and development agreement and expects to submit an
application for FDA 510(k) clearance of a number of tests in the third quarter
of 2001. The Company also expects to begin shipping tests for international
distribution by Meridian during the second half of 2001.
Histofreezer(R)
- ------------
In 1991, the Company became the exclusive U.S. distributor of the Histofreezer
Portable Cryosurgical System, a low-cost alternative to liquid nitrogen and
other eradication methods for removal of benign epidermal lesions. In June 1998,
the Company acquired the Histofreezer product from Koninklijke, Utermohlen,
N.V., The Netherlands. As part of the acquisition, the Company established a
sales office in Reeuwijk, The Netherlands, and is now integrating a dealer
network in more than 20 countries worldwide.
Histofreezer is a mixture of two environmentally friendly cryogenic gases in a
small aerosol canister. When released, these gases are delivered to a specially
designed foam bud, cooling the bud to -55C. The frozen bud is then applied to
the lesion for 20 to 40 seconds creating localized destruction of the target
area. Histofreezer is sold in two sizes of canisters. Histofreezer sales have
been targeted to primary care physicians such as pediatricians, general and
family practitioners, and other physician segments that traditionally referred
patients to dermatologists to remove warts. The Company has established a
national network of distributors to reach the physician office market in the
United States
Immunoassay Tests and Reagents
- ------------------------------
The Company develops and sells immunoassay tests in two formats, MICRO-PLATE and
AUTO-LYTE(R), to meet the specific needs of its customers. Both types of assays
are sold as finished kits.
AUTO-LYTE tests are sold as bottles of reagents. The reagents are used with
commercially available automated analytical instruments which are manufactured
by a variety of third parties. AUTO-LYTE tests provide medium sensitivity to
detect substances comprised of small molecules. AUTO-LYTE is typically used in
high volume, automated, commercial reference laboratories. Test results are
produced faster, allowing for higher throughput.
In the MICRO-PLATE kit, the sample to be tested is placed into a microwell along
with the reagents. The result of the test is determined by the color of the
microwell upon completion of the reaction. Controlling the reaction involves the
use of a variety of reagents by laboratory personnel. Test results are analyzed
by any of a variety of commercially available laboratory instruments which are
generally not provided by the Company. The test kit is commonly used for high
sensitivity measurement of substances comprised of both large and small
molecules. OraSure Technologies has used this testing format to develop tests
that detect substances in urine, serum, and oral fluid specimens. The
MICRO-PLATE assays generally have greater sensitivity than the AUTO-LYTE assays.
OraSure Technologies currently markets the MICRO-PLATE oral fluid test for use
in screening life insurance applicants to test for two of the most important
underwriting risk factors: cocaine and cotinine (a metabolite of nicotine). The
Company sells the reagents to insurance testing laboratories, which may in turn
provide the laboratory testing to insurance companies, often in combination with
the OraSure oral fluid collection device. AUTO-LYTE tests are marketed for use
in testing urine samples for cocaine and cotinine and for performing a variety
of urine chemistries for insurance risk assessment purposes.
The Company also develops, manufactures, and sells toxicology and drugs-of-abuse
tests in the MICRO-PLATE format. These MICRO-PLATE tests can be performed on
commonly used instruments and can detect drugs in urine, serum, and sweat
specimens. MICRO-PLATE tests are also used as part of the Intercept product line
to detect drugs-of-abuse in oral fluid specimens. The Company's toxicology and
drugs-of-abuse test products are currently sold in the forensic toxicology,
criminal justice, drug rehabilitation and workplace testing markets.
Whenever possible, the Company enters into multi-year purchase agreements and
reagent rental agreements with its customers. These agreements generally are
entered into with a laboratory which has agreed to purchase a minimum number of
tests over a two-to-five-year period. The Company also offers these customers
the option of a reagent rental agreement pursuant to which the Company provides
the tests as well as analytical laboratory equipment.
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Western Blot Confirmatory Tests
- -------------------------------
The Company markets an oral-based HIV-1 Western Blot confirmatory test that
received FDA clearance in 1996. This test uses the original specimen collected
with the OraSure oral fluid collection device to confirm positive results of
initial OraSure HIV-1 screening tests. The oral fluid Western Blot HIV-1
confirmatory test is marketed under an exclusive arrangement with Organon
Teknika Corporation.
In February 2001, the Company announced the indefinite suspension of the
production of EPIblot, a serum-based Western Blot HIV-1 confirmatory test. The
serum Western Blot product accounted for approximately 5% of the Company's 2000
revenue, but has been consistently unprofitable because of low production yields
and the high cost of ensuring the quality of the end product.
Q.E.D.(R) Saliva Alcohol Test
- -----------------------------
The Q.E.D. Saliva Alcohol Test is an on-site, cost-effective test device which
is an alternative to breath or blood alcohol testing. The test is a
quantitative, saliva-based method for the detection of ethanol, and has been
cleared for sale by the FDA and the U.S. Department of Transportation ("DOT").
The product received a Clinical Laboratory Improvement Act of 1988 ("CLIA")
waiver in 1997. Each Q.E.D. test kit contains a collection stick which is used
to collect a sample of saliva and a disposable detection device that displays
results in a format similar to a thermometer. The Q.E.D. device is easy to
operate and instrumentation is not required to read the result. The product line
comes in two testing ranges, 0 to 0.145% and 0 to 0.30% blood alcohol, and
produces results in two to five minutes.
The markets for alcohol testing are relatively small and fragmented with a broad
range of legal and procedural barriers to entry. Markets range from law
enforcement testing to workplace testing of employees in safety sensitive
occupations. The Q.E.D. test has been successfully adopted by end users in the
petroleum, heavy construction, trucking, and retail businesses because it is a
cost-effective, portable, easy-to-administer, quantitative testing method.
Typical usage situations include pre-employment, random, post-accident,
reasonable-cause, and return-to-duty testing.
PRODUCTS UNDER DEVELOPMENT
OraSure Applications
- --------------------
Oral mucosal transudate contains many constituents found in blood serum,
although in lower concentrations. The Company therefore believes the OraSure
device is a platform technology with a wide variety of potential applications
beyond HIV-1 and drugs-of-abuse testing. For example, the OraSure device may be
useful for the diagnosis of a variety of infectious diseases or conditions in
addition to HIV-1, such as viral hepatitis, syphilis and diabetes. The National
Institutes of Health ("NIH") approved a grant of approximately $1 million to
fund Phase II of the Company's project to develop a screening and confirmation
test for syphilis using an oral fluid sample collected with the OraSure device.
The Company previously received a grant of $118,000 from the NIH as funding for
Phase I of this project, which was completed in 2000. OraSure Technologies has
also entered into an agreement with LabOne to develop a laboratory-based oral
fluid screening test for Hepatitis C using the OraSure collection device. The
Company is presently developing an improved formulation of the OraSure device,
to be called OraSure II, which will be designed to improve the effectiveness of
collecting and preserving human antibodies in oral fluid for infectious disease
testing and is expected to be more cost effective.
The Company is also developing additional drug assays to be used in connection
with its Intercept product line in the insurance testing, criminal justice and
drug rehabilitation markets.
OraQuick Platform
- -----------------
The Company believes that OraQuick has significant potential as a rapid test for
physician offices, hospitals and other professional use. Like OraSure, the
Company believes that OraQuick provides a platform technology that can
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be modified for detection of a variety of infectious diseases in addition to
HIV, such as viral hepatitis, syphilis and other diseases.
UPT and UPlink Development
- --------------------------
The Company is in the final stages of developing an UPlink system for rapid
drugs-of-abuse testing under its agreement with Drager and for its own
commercial applications in the U.S. The Company has commenced development of
three tests for infectious diseases and expects to commence development of
additional tests later in 2001 for other infectious diseases under its agreement
with Meridian. Other potential applications of UPT include thyroid testing,
cancer testing, cardiac testing and therapeutic drug monitoring. In addition,
the Company is studying the feasibility of using UPT labels for the detection of
infectious diseases with DNA probes.
Western Blot Confirmatory Test
- ------------------------------
The Company is developing an improved Western Blot confirmatory test for HIV-1,
which will be designed for use on oral fluid, whole blood, and serum\plasma
specimens.
RESEARCH AND DEVELOPMENT
In 2000, research and development activities focused on the development of the
OraQuick HIV-1/2 rapid test (including significant clinical trials, validation
and scale-up expenses), development of the UPlink reader, test cassette and
collector for drugs-of-abuse applications, DNA feasibility studies, and
regulatory compliance. In addition, the Company also performed research and
development activities with respect to additional Intercept products, new
antibody development, and improvements to existing products.
The Company supplements its own research and development activities by funding
external research. The Company has been funding, and will continue to fund,
research at Leiden University, SRI International, and Lehigh University.
Research and development expenses totaled approximately $10.4 million in 2000,
$5.6 million in 1999, and $4.5 million in 1998.
SALES AND MARKETING
The Company's strategy is to reach its major target markets through a
combination of direct sales, strategic partnerships, and independent
distributors. The Company's marketing strategy is to raise awareness of its
products through a mix of trade shows, print advertising, and distributor
promotions to support sales to each target market.
The Company markets its products in the United States and internationally.
Product revenue attributable to customers in the United States amounted to $24.8
million, $21.4 million, and $17.8 million in 2000, 1999 and 1998, respectively.
Revenues attributable to international customers amounted to $4.0 million, $2.7
million, and $2.6 million in 2000, 1999 and 1998, respectively.
Insurance Testing
- -----------------
The Company currently markets the OraSure oral fluid collection device for use
in screening life insurance applicants in the U.S. and internationally to test
for three of the most important underwriting risk factors: HIV-1, cocaine, and
cotinine (a metabolite of nicotine). The Company sells the devices to insurance
testing laboratories, which in turn provide the devices to insurance companies,
usually in combination with testing services. The Company maintains a direct
sales force that promotes use of the OraSure device directly to insurance
companies. Insurance companies then make their own decision regarding which
laboratory to use to supply their collection devices and testing services.
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Because insurance companies are in various stages of their adoption of the
OraSure device, there exists a wide range of policy limits where the product is
being applied. Some insurance companies have chosen to extend their testing to
lower policy limits where they did not test at all before, while others have
used OraSure to replace some of their blood-based testing. The Company's sales
force continues to encourage additional insurance companies to use OraSure and
to extend the use of the product by existing customers. Several companies have
expanded use of OraSure in "Preferred" products in addition to the $1 million
and higher dollar policy amounts. This expansion is attributable to several
factors, including increasing comfort with the reliability of oral fluid testing
following its successful use, the high quality of test results, the low cost of
oral fluid testing relative to blood tests, and the ease of use of OraSure.
The Company also sells its AUTO-LYTE and MICRO-PLATE assays and reagents in the
insurance testing market directly to laboratories. AUTO-LYTE assays are used
principally to test urine samples for cotinine and other metabolites and to
perform urine chemistries for risk assessment purposes. MICRO-PLATE assays are
used principally to test oral fluid specimens collected with the OraSure device
for cocaine and cotinine.
Public Health and Physician Office Markets
- ------------------------------------------
The Company's sales personnel market its products directly to customers in the
public health market. This market consists of a broad range of clinics and
laboratories and includes states, counties, and other governmental agencies,
colleges and universities, correctional facilities and the military. There are
also a number of similar organizations in the public health market such as AIDS
service organizations and various community-based organizations set up primarily
for the purpose of encouraging and enabling HIV-1 testing. To better serve this
market, the Company has entered into agreements with LabOne and Heritage Labs to
provide prepackaged OraSure test kits, with prepaid laboratory testing and
specimen shipping costs included. The Company also began distributing the
OraQuick HIV-1/2 device in the public health markets internationally through
independent distributors in December 2000.
The Company sells the Histofreezer product line to distributors that market to
more than 150,000 primary care physicians and podiatrists in the U.S. Major U.S.
distributors include McKesson HBOC, Physicians Sales & Service, Bergen Brunswig,
and Henry Schein. Internationally, the Company markets Histofreezer in a number
of countries through a network of distributors, the largest of which is B.
Braun.
Substance Abuse
- ---------------
The Company's substance abuse products are marketed into the workplace testing,
forensic toxicology, criminal justice, and drug rehabilitation markets. The
forensic toxicology market consists of 250 - 300 laboratories including federal,
state and county crime laboratories, medical examiner laboratories, and
reference laboratories. The criminal justice market consists of a wide variety
of entities in the criminal justice system that require drug screening, such as
pre-trial services, parole and probation officials, drug courts, prisons, drug
treatment programs and community/family service programs. The Company has
entered into a contract with LabOne to assemble and distribute Intercept
collection kits and associated reagents for drugs-of-abuse testing in the
workplace testing market in the United States and Canada. Intercept and Q.E.D.
are also marketed through direct sales and other distributors.
International Markets
- ---------------------
The Company sells a number of its products into international markets primarily
through distributors with knowledge of their local markets. Principal markets
include insurance testing, public health and laboratory testing. The Company
assists its distributors in registering the products in each country and
provides training and support materials. The Company's international marketing
program includes direct assistance to distributors in arranging for laboratory
services, cooperation from screening test manufacturers, and performance of
Western Blot confirmatory tests when necessary.
8
SIGNIFICANT PRODUCTS AND CUSTOMERS
Several different products have contributed significantly to the Company's
financial performance, accounting for 15% or more of total revenues during the
past three years. The Company's OraSure oral fluid collection devices,
Histofreezer, and immunoassay tests and reagents accounted for total revenues of
approximately $11.2 million, $6.8 million, and $6.7 million in 2000, $7.8
million, $5.7 million, and $6.2 million in 1999, and $7.2 million, $4.8 million,
and $4.8 million in 1998, respectively.
The Company has one customer that has accounted for 10% or more of total
revenues. During 2000, the Company's sales to LabOne, Inc., accounted for
approximately 23% of the Company's total revenues. The Company believes that its
relationship with this customer is strong and that it will purchase comparable
or increasing values of the Company's products for the foreseeable future.
However, there can be no assurance that sales to this customer will not decrease
or that this customer will not choose to replace the Company's products with
those of competitors. The loss of this customer or a significant decrease of
products purchased by it could have a material adverse effect on the Company.
SUPPLY AND MANUFACTURING
The Company has entered into an agreement with a contractor in Oregon for the
assembly and supply of OraSure oral fluid collection devices until December 31,
2002. This agreement will automatically renew for additional annual periods
unless either party provides timely notice of termination prior to the end of an
annual period. The Company believes that other firms or the Company would be
able to manufacture the OraSure device on terms no less favorable than those set
forth in the agreement with the Oregon contractor in the event that this
contractor were to be unable to continue manufacturing this product, although a
change in manufacturer of the OraSure device would require FDA review and
clearance which could require significant time to complete.
In February 2001, the Company announced its plans to realign its manufacturing
operations, which will include the elimination of the manufacturing of OraQuick
in the Beaverton, Oregon facility, the installation of automated manufacturing
equipment for OraQuick in Bethlehem, Pennsylvania, and the addition of
manufacturing capacity in Thailand. In connection with this realignment, the
Company has entered into a supply agreement for the manufacture of OraQuick
HIV-1/2 testing devices in Thailand. This agreement has an initial term of one
year from the date production commences, which will automatically renew for
additional annual periods unless either party provides a timely notice of
termination prior to the end of an annual period. The Company believes that
other firms would be able to manufacture the OraQuick test on terms no less
favorable than those set forth in the Thailand agreement in the event that the
Thailand contractor were to be unable to continue manufacturing this product.
The Company expects to assemble readers, test cassettes and collectors used in
the Company's UPlink rapid test and to package this product for shipment at the
Company's Bethlehem facilities.
The Company's oral fluid Western Blot HIV confirmatory test is manufactured in
the Company's Beaverton, Oregon facilities. The HIV-1 antigen needed to
manufacture the Company's Western Blot HIV confirmatory test kits is available
from only a limited number of sources. Organon Teknika Corporation, the
exclusive distributor of the test kits, is required to supply the Company's
requirements for antigen for the term of its distribution agreement with the
Company, which originally extended to March 31, 2001. OraSure Technologies and
Organon Teknika are currently negotiating certain amendments to the agreements,
including an extension of their terms. If for any reason Organon Teknika should
no longer be able to supply the Company's antigen needs, management believes the
Company would be able to obtain its own supply of antigen at a competitive cost,
although a change in the antigen would require FDA approval.
Histofreezer is manufactured in The Netherlands by Koninklijke, Utermohlen,
N.V., the company from which the Company acquired the product in 1998. The
Company purchases the product pursuant to an exclusive production agreement
between the two companies. The production agreement provides that Koninklijke,
Utermohlen, N.V. shall be the exclusive supplier of the Histofreezer product
until June 1, 2003. The Company believes that additional manufacturers of the
Histofreezer product are available on terms no less favorable than the terms of
the production
9
agreement with Koninklijke, Utermohlen, N.V. in the event that Koninklijke,
Utermohlen, N.V. were to be unable to continue manufacturing the Histofreezer
product.
The Company's AUTO-LYTE and MICRO-PLATE assays are manufactured at its
Bethlehem, Pennsylvania, facility. The Company manufactures the test components
and assembles and packages the tests for distribution. The Company's tests
require the production of highly specific and sensitive antibodies corresponding
to the antigen of interest. Antibodies are produced commercially by injecting a
vaccine consisting of a purified, specific antigen into one of a variety of
animals. The injected animal's immune system then manufactures antibodies, which
are contained in blood samples and are collected on a routine basis, purified
through the use of a chemical process, and prepared for use in various
diagnostic products. Substantially all of the Company's antibody requirements
are produced by contract suppliers. However, in 1999, the Company began to
develop its own in-house monoclonal and polyclonal antibody capabilities. The
Company believes that it maintains adequate reserves of antibody supplies and
believes it has access to sufficient raw materials for these products.
AUTO-LYTE test kits are manufactured by adding specific antibodies to chemical
solutions which are then packaged as a defined volume of liquid in a plastic
container for use in laboratory equipment. MICRO-PLATE test kits are produced by
placing purified antibodies onto a plastic container which is sent to customers
in multiples of ninety-six tests along with a set of reagents necessary to
control the reaction. The reaction container is sealed in a foil package and
placed in a box with the reagents.
The Q.E.D. test is manufactured, packaged, and shipped from the Company's
Bethlehem facility.
EMPLOYEES
As of December 31, 2000, the Company had 210 full-time employees, including 42
in sales, marketing, and client services; 73 in research and development; 77 in
operations, manufacturing, quality control, purchasing and shipping; and 18 in
administration and finance. Sixteen of the Company's employees hold Ph.D.
degrees. The Company's employees are not represented by a collective bargaining
agreement.
On February 1, 2001, the Company announced that in connection with the
realignment of its manufacturing operations, employee headcount would be reduced
in its Beaverton, Oregon office by approximately 35 persons, or 33% of staffing
at that facility. This reduction is expected to occur through layoffs and
attrition during the first half of 2001. The Company expects to increase
staffing at its Bethlehem, Pennsylvania facility as a result of the start-up of
manufacturing operations at that location.
COMPETITION
The diagnostic industry is a multi-billion dollar international industry and is
intensely competitive. Many of the Company's competitors are substantially
larger and have greater financial, research, manufacturing, and marketing
resources. Important competitive factors for the Company's products include
product quality, price, ease of use, customer service, and reputation. Industry
competition is based upon scientific and technological capability, proprietary
know-how, access to adequate capital, the ability to develop and market products
and processes, the ability to attract and retain qualified personnel, and the
availability of patent protection.
A few large corporations produce a wide variety of diagnostic tests and other
medical devices and equipment, a larger number of mid-size companies generally
compete only in the diagnostic industry, and, finally, a significant number of
small companies produce only a few diagnostic products. As a result, the
diagnostic test industry is fragmented and segmented. The future market for
diagnostic tests is expected to be characterized by consolidation, greater cost
consciousness, and tighter reimbursement policies. The purchasers of diagnostic
products are expected to place increased emphasis on lowering costs, automation,
service, and volume discounts. The increased complexity of the market is
expected to force many competitors to enter into joint ventures or license
certain products or technologies.
Competition may intensify as technological advances are made and become more
widely known and as products reach the market in greater numbers. Furthermore,
new testing methodologies could be developed in the future that
10
render the Company's products impractical, uneconomical or obsolete. There can
be no assurance that the Company's competitors will not succeed in developing or
marketing technologies and products that are more effective than those developed
by the Company or that would render its technologies and products obsolete or
otherwise commercially unattractive. In addition, there can be no assurance that
competitors will not succeed in obtaining regulatory approval for these
products, or in introducing or commercializing them before the Company. Such
developments could have a material adverse effect on the Company's business,
financial condition, and results of operations.
Competition in the market for HIV testing is intense and is expected to
increase. The Company believes that the principal competition will come from
existing laboratory-based blood tests, point-of-care whole blood rapid tests,
urine-based assays, or other oral fluid-based tests that may be developed. The
Company's competitors include specialized biotechnology firms as well as
pharmaceutical companies with biotechnology divisions and medical diagnostic
companies.
Several companies market or have announced plans to market oral specimen
collection devices and tests outside the United States and have announced plans
to seek FDA approval of such tests in the United States. The Company expects the
number of devices competing with its OraSure device to increase as the benefits
of oral specimen-based testing become more widely accepted.
The FDA has approved an HIV-1 screening test for use with a urine sample. In
June 1998, the FDA notified Cambridge Biotech Corp. (acquired by Calypte, Inc.
in December 1998) that it had approved the use of its HIV-1 Western Blot
confirmatory test for use with urine samples. Although the sensitivity and
specificity are less than blood-based or oral fluid tests, urine testing will
compete in the same markets as the Company's products. The Company believes that
urine collection can be logistically more difficult, inconvenient and
potentially embarrassing for the individual being tested, and that privacy and
chain-of-custody issues are further impediments to routine use of urine-based
HIV tests. The Company cannot predict the impact of the availability of
urine-based tests on the HIV testing market or on sales of the Company's
products.
Calypte, Inc. and Bio-Rad Laboratories, Inc. manufacture HIV Western Blot
confirmatory tests, and Waldheim Pharmazeutika manufactures
immuno-fluroescent HIV confirmatory tests, which competed with the Company's
HIV-1 Western Blot serum-based confirmatory test kits and could compete with
the Company's improved Western Blot confirmatory test once developed.
Significant competitors in the rapid assay HIV testing market include Abbott
Laboratories, the Ortho Diagnostics division of Johnson & Johnson, and Trinity
Biotech.
In the insurance risk assessment market, the Company's AUTO-LYTE homogeneous
assays for cocaine and cotinine compete with reagents from Microgenics, Inc. (a
subsidiary of Sybron Lab Products). The Company's AUTO-LYTE homogeneous assays
for beta-blockers and thiazide as well as MICRO-PLATE heterogeneous assays for
the detection of cocaine, cotinine and IgG in oral fluid are the only assays
available in the marketplace. In urine chemistries, the Company's significant
competitors include The Diagnostics Systems Group of Olympus America Inc. and
Roche Diagnostics.
The Company's MICRO-PLATE drugs-of-abuse reagents are targeted to forensic
testing laboratories where sensitivity, automation, and "system solutions" are
important. In the past, these laboratories have typically had to rely on
radioimmunoassay test methods to provide an adequate level of sensitivity.
Radioimmunoassays require radioactive materials, which have a short shelf-life
and disposal problems. The Company's MICRO-PLATE tests meet the laboratories'
sensitivity needs, run on automated equipment, and are delivered to the
laboratory as a complete "system package" of reagents and instrumentation (known
as a "reagent rental" transaction) to meet the specific needs of each customer.
Rental reagent transactions are usually offered only by companies significantly
larger than OraSure Technologies.
In the forensic toxicology market, the Company competes with both homogeneous
and heterogeneous tests manufactured by a host of companies. Significant
competitors in the market for homogeneous assays include Dade Behring, Abbott
Diagnostics, Roche Diagnostics, and Immunalysis.
11
The Intercept drug testing service competes with a wide variety of drug testing
products and services. These competitors can be divided into two groups: 1)
rapid tests, and 2) laboratory-based services. Within each product or service
group, drug testing can be further divided into testing matrices such as urine,
hair, sweat and oral fluid. Major competitors in the laboratory-based drug
testing market are Quest Diagnostics, LabCorp., Psychemedics, PharmChem, and
Medtox Laboratories. The drugs-of-abuse application of UPlink will compete with
other rapid drug assays. Major competitors in the rapid drug testing market
include American Biomedica, Roche Diagnostics, Inc., and Biosite Diagnostics.
Within the sub-segment of oral fluid drugs-of-abuse testing, Intercept competes
with Avitar, Inc., which markets a rapid test called Oral Screen(TM) to the
workplace and criminal justice markets, and LifePoint, Inc., which has announced
plans to sell a reader-based saliva test panel that will include alcohol
testing.
Q.E.D. has two direct competitors, Roche Diagnostics, Inc. and Chematics. These
companies offer semi-quantitative saliva-based alcohol tests and both have
received DOT approval. Indirect competitors who offer breath testing equipment
include Intoximeters, Drager, and CMI. Although there are lower priced tests on
the market that use oral fluid or breath as a test medium, these tests are
qualitative tests that are believed to be substantially lower in quality and
scope of benefits than the Company's Q.E.D. test.
The Histofreezer product's patented delivery system and warmer operating
temperature than liquid nitrogen provide the Company with the opportunity to
target sales to primary care physicians, such as family practitioners,
pediatricians, and podiatrists. The Company does not target sales to
dermatologists because they have the volume of patients required to support the
capital costs associated with a liquid nitrogen delivery system. There is
limited competition for convenient cryosurgical products for wart removal in the
primary care physician market. Competition for the Histofreezer product includes
portable cryosurgical systems from CryoSurgery, Inc. and Ellman International.
In addition, liquid nitrogen is used by medical professionals to remove warts
and other benign skin lesions. Lastly, patients may purchase various
over-the-counter products to treat warts at home.
PATENTS AND PROPRIETARY INFORMATION
The Company seeks patent and other intellectual property rights to protect and
preserve its proprietary technology and its right to capitalize on the results
of its research and development activities. The Company also relies upon trade
secrets, know-how, continuing technological innovations, and licensing
opportunities to provide it with competitive advantages in its selected markets
and to accelerate new product introductions. Respecting the patent and
intellectual property rights of others, the Company regularly searches for
third-party patents in its fields of endeavor to shape its own patent and
product commercialization strategies as effectively as possible and to identify
licensing opportunities. United States patents generally have a maximum term of
20 years from the date an application is filed.
The Company has six United States patents and numerous foreign patents for the
OraSure collection device and related technology, and has applied for additional
patents, in both the United States and certain foreign countries, on such
product and technology. The Company has one patent application pending for
OraQuick HIV-1/2 in the United States and has obtained or is seeking licenses
under existing patents held by third parties with respect to that product and
technology. The Company may need to obtain licenses or other rights under, or
enter into distribution or other business arrangements in connection with,
certain HIV-2 and lateral flow patents, some of which have been obtained, in
order to market the OraQuick HIV-1/2 test in the United States and certain other
countries. See the Section entitled, "Risk Factors - Patent Issues Affecting
OraQuick," for a further discussion of these issues.
In April 1995, the Company received exclusive worldwide rights under patents and
know-how owned by SRI International to develop and market products that involve
the use of UPT. The Company also received non-exclusive worldwide rights under
patents and know-how owned by the Sarnoff Corporation (formerly called the David
Sarnoff Research Center) to develop and market products that involve the use of
UPT. The Company has the right to sublicense these rights under the agreements
subject to consent from SRI and Sarnoff.
12
Under the agreement with SRI, OraSure Technologies is required to make license,
maintenance and royalty payments to SRI. The Company made an initial license
payment to SRI in 1995 and paid research fees in 1995 and 1996 in connection
with development projects in which SRI participated. The Company is obligated to
make annual maintenance payments on each anniversary of the agreement following
the completion of the development period until the first commercial sale of a
product. The Company also must make royalty payments for a period equal to the
longer of ten years from the date of the first commercial sale of the products
or the term during which the manufacture, use, or sale of a product would
infringe licensed patents, but for SRI's license to the Company. The Company
believes that the royalty rates payable by the Company are comparable to the
rates generally payable by other companies under similar arrangements. The
Company's agreement with SRI terminates upon the expiration of the Company's
obligation to pay royalties to SRI.
In 1999, the Company paid $1.5 million to TPM Europe Holding B.V., its
sublicensor (1) for the termination of an existing license agreement between the
sublicensor and the Company with respect to the sublicense of UPT patents owned
by Leiden University, The Netherlands, and (2) to secure a direct research,
development, and license arrangement with Leiden University.
The United States and European Patent Offices have issued licensors nine patents
for methods, compositions, and apparatuses relating to phosphor technologies.
Several additional UPT patent applications remain pending in the U.S. and
abroad. The Company expects to continue to expand its UPT patent portfolio in
2001.
The Company has one U.S. patent relating to the Company's method for detecting
blood in urine specimens and the Company's AUTO-LYTE products.
The Company has four U.S. patents and numerous foreign patents issued for
apparatuses and methods for the topical removal of skin lesions relating to its
Histofreezer device.
The Company has five U.S. patents and numerous foreign patents and patent
applications for the analog-to-digital threshold signaling technology used in
the Q.E.D. test. These patents are related to the analog-to-digital technology
color control systems and methods, systems and devices for the test, and
detection of biochemical molecules.
It is the Company's policy to require its employees, consultants, outside
collaborators, and other advisors to execute confidentiality agreements upon the
commencement of employment or consulting relationships with the Company. These
agreements provide that all confidential information developed by or made known
to the individual during the course of the individual's relationship with the
Company, is to be kept confidential and not disclosed to third parties except in
specific circumstances. In the case of employees, the agreements provide that
all inventions conceived by the individual during his or her tenure at the
Company will be the exclusive property of the Company.
The Company owns rights to trademarks and service marks that it believes are
necessary to conduct its business as currently operated. The Company is the
owner in the United States of trademarks, including UPT(TM), UPlink(TM),
OraSure(R), Intercept(TM), OraQuick(R), Histofreezer(R), Q.E.D.(R), and
AUTO-LYTE(R). The Company also is the owner of many of these marks and others in
several foreign countries. The Company is not aware of any pending claims of
infringement or other challenges to the Company's rights to use its marks in the
United States or in other countries as currently used by the Company.
Although important, the issuance of a patent or existence of trademark or trade
secret protection does not in itself ensure the Company's success. Competitors
may be able to produce products competing with a patented Company product
without infringing on the Company's patent rights. Issuance of a patent in one
country generally does not prevent manufacture or sale of the patented product
in other countries. The issuance of a patent to the Company or to a licensor is
not conclusive as to validity or as to the enforceable scope of the patent. The
validity or enforceability of a patent can be challenged by litigation after its
issuance, and, if the outcome of such litigation is adverse to the owner of the
patent, the owner's rights could be diminished or withdrawn. Trade secret
protection does not prevent independent discovery and exploitation of the secret
product or technique.
13
GOVERNMENT REGULATION
General
- -------
Most of the Company's existing and proposed diagnostic products are regulated by
the FDA, certain state and local agencies, and comparable regulatory bodies in
other countries. This regulation governs almost all aspects of development,
production, and marketing, including product testing, authorizations to market,
labeling, promotion, manufacturing, and recordkeeping. All of the Company's
FDA-regulated products require some form of action by the FDA before they can be
marketed in the United States, and, after clearance, the Company must continue
to comply with other FDA requirements applicable to marketed products. Both
before and after clearance, failure to comply with the FDA's requirements can
lead to significant penalties.
Domestic Regulation
- -------------------
Most of the Company's diagnostic products are regulated as medical devices. The
Western Blot HIV-1 confirmatory test is regulated as a biologic product.
There are two review procedures by which medical devices can receive FDA
clearance. Some products may qualify for clearance under a Section 510(k)
procedure, in which the manufacturer provides a premarket notification that it
intends to begin marketing the product, and shows that the product is
substantially equivalent to another legally marketed product (i.e., that it has
the same intended use and is as safe and effective as a legally marketed device
and does not raise different questions of safety and effectiveness). In some
cases, the submission must include data from human clinical studies. Marketing
may commence when the FDA issues a clearance letter finding such substantial
equivalence. Clearance under this procedure may be granted within 90 days,
although in some cases as much as a year or more may be required.
If the medical device does not qualify for the 510(k) procedure (either because
it is not substantially equivalent to a legally marketed device or because it is
a Class III device required by statute and the FDA's implementing regulations to
have an approved application for premarket approval), the FDA must approve a
premarket approval application ("PMA") before marketing can begin. PMAs must
demonstrate, among other matters, that the medical device provides a reasonable
assurance of safety and effectiveness. A PMA is typically a complex submission,
including the results of preclinical and clinical studies. Preparing a PMA is a
detailed and time-consuming process. Once a PMA has been submitted, the FDA's
review may be lengthy, often requiring one year or more, and may include
requests for additional data.
Biologic products must be the subject of an approved biologics license
application ("BLA") before they can be marketed. The FDA approval process for a
biologic is similar to the PMA approval process, involving a demonstration of
the product's safety and effectiveness based in part on both preclinical and
clinical studies.
Many of the insurance testing products are used for non-medical purposes and
many of the drugs-of-abuse products sold to state crime labs are labeled for
"forensic use only." The FDA does not currently regulate these products.
Every company that manufactures biological products or medical devices
distributed in the United States must comply with the FDA's Good Manufacturing
Practices ("GMP") regulations (also known as the Quality System Regulations).
These regulations govern the manufacturing process, including design,
manufacture, testing, release, packaging, distribution, documentation, and
purchasing. Compliance with GMPs is generally required before the FDA will
approve a PMA or BLA, and these requirements also apply to marketed products.
Companies are also subject to other post-market and general requirements,
including compliance with restrictions imposed on marketed products, compliance
with promotional standards, recordkeeping, and reporting of certain adverse
reactions. The FDA regularly inspects companies to determine compliance with
GMPs and other post-approval requirements. Failure to comply with statutory
requirements and the FDA's regulations can lead to substantial penalties,
including monetary penalties, injunctions, product recalls, seizure of products,
and criminal prosecution.
14
In June 2000, the FDA issued observations of deficiencies following an
inspection of OraSure Technologies' manufacturing facilities in Beaverton,
Oregon, stating the FDA's view that some of the Company's products were not
manufactured in compliance with GMP regulations. The FDA previously issued a
warning letter in September 1998, and observations of deficiencies in January
1999 to the Company based on prior inspections of the Oregon facilities. The FDA
has questioned the Company's compliance with GMP regulations in areas such as
process validation, purchasing controls, complaint handling, and equipment
controls at the Oregon facilities. The Company has undertaken a substantial
review of its manufacturing and quality assurance, and has either already made
changes or has changes in process, to satisfy the FDA's regulations with respect
to its GMP compliance. These plans were communicated to the FDA in a written
reply in September 2000.
On October 20, 2000, the FDA sent a letter to the Company regarding the Serum
Western Blot product voicing the agency's concern over the previously observed
deficiencies and stating its intent to revoke the Company's license to
manufacture this product if the problems were not corrected in sufficient time.
The FDA acknowledged the receipt of the Company's written responses and found
that those items which had been completed appeared to be adequate, but required
the Company to submit a comprehensive report on corrective action plans and the
schedule to address the remaining items. The Company submitted such a report in
November 2000, and believes that it either has already implemented changes or
has changes in process that will adequately address the FDA's concerns.
Although production of the Serum Western Blot product line has been suspended,
OraSure Technologies has recognized that the basic changes to the overall
quality systems needed to remedy the FDA's observations would also assist in the
quality for all of the Company's product lines, and therefore has devoted a
considerable amount of time and resources to improving quality procedures
throughout the Company. Even with the substantial efforts and the progress made
to date, there is a risk that the FDA will not be satisfied by the Company's
efforts. If the FDA is not satisfied, it could take action intended to force
OraSure Technologies to stop manufacturing its Western Blot or other products
until the FDA believes the Company is in compliance with GMP requirements. Also,
although the FDA has recently granted the Company permission to obtain
certificates needed for export of products, the FDA could refuse export
permission in the future if the agency determines that the Company's progress
toward GMP compliance is not sufficient.
The Company has voluntarily recalled Q.E.D. tests on two occasions. In both
instances, the Q.E.D. tests were recalled because the Company did not believe
that the materials met its quality standards. Both recalls were conducted
according to FDA guidelines. The FDA investigated the initial recall in December
1996 and did not take any action against the Company. The FDA investigated the
second recall in March 1998 and issued a 483 Notice due to the Company's failure
to confirm to the FDA that the corrective actions taken by the Company to remedy
the deficiencies leading to the March 1998 recall had corrected the problems.
The Company has confirmed with the FDA that its corrective actions addressed the
issues that led to the recall. If violations of the applicable regulations are
noted during future FDA inspections of the Company's manufacturing facility, or
the manufacturing facilities of a contract manufacturer, the continued marketing
of the Company's products may be adversely affected.
International
- -------------
The Company is also subject to regulations in foreign countries governing
products, human clinical trials and marketing. Approval processes vary from
country to country, and the length of time required for approval or to obtain
other clearances may in some cases be longer than that required for U.S.
governmental approvals. The extent of potentially adverse governmental
regulation affecting the Company that might arise from future legislative or
administrative action cannot be predicted. The Company will pursue approval only
in those countries that have a significant market opportunity.
The International Organization for Standardization ("ISO") is a worldwide
federation of national standards bodies from some 130 countries, established in
1947. The mission of ISO is to promote the development of standardization and
related activities in the world with a view to facilitating the international
exchange of goods and services. ISO certification is evidenced by the CE mark
and indicates that the Company's quality system has complied with standards
applicable from initial product design and development through production and
distribution. ISO certification is a prerequisite to obtaining a CE mark, which
is required for distribution of medical devices in the European common markets.
15
In the first quarter of 1999, the Company received approval to use the CE mark
for the OraSure and Intercept collection devices. In December 2000, the
Company's Bethlehem facility received final certification for the European
Medical Device Directive (93/42/EEC), ISO 9001, ISO 13485, and EN46001. The
Company also received authorization to use the CE mark for its Histofreezer
product line.
The Company must also submit evidence of marketing clearance by the FDA to
Health Canada's Therapeutic Products Programme prior to commencing sales in
Canada. The Company has completed this process for several of its current
products which require FDA review.
Environmental Regulation
- ------------------------
Because of the nature of its current and proposed research, development, and
manufacturing processes, the Company is subject to stringent federal, state, and
local laws, rules, regulations, and policies governing the use, generation,
manufacture, storage, air emission, effluent discharge, and handling and
disposal of materials and wastes. The Company believes that it has complied with
these laws and regulations in all material respects and has not been required to
take any action to correct any noncompliance.
FORWARD-LOOKING STATEMENTS
This Report contains certain "forward-looking statements," within the meaning of
the Federal securities laws. These include statements about expected revenues,
earnings, expenses or other financial performance, future product performance or
development, expected regulatory filings and approvals, planned business
transactions, views of future industry or market conditions, other factors that
could affect future operations or financial position, and statements that
include the words "believes," "expects," "anticipates," "intends," "plans,"
"estimates," "may," "will," "should," "could," or similar expressions.
Forward-looking statements are not guarantees of future performance or results.
Known and unknown factors could cause actual performance or results to be
materially different from those expressed or implied in these statements. Some
of these factors are: ability to market products; impact of competitors,
competing products and technology changes; ability to develop, commercialize and
market new products; market acceptance of oral fluid testing products and
up-converting phosphor technology products; ability to fund research and
development and other projects and operations; ability to obtain and timing of
obtaining necessary regulatory approvals; ability to develop product
distribution channels; uncertainty relating to patent protection and potential
patent infringement claims; ability to enter into international manufacturing
agreements; obstacles to international marketing and manufacturing of products;
loss or impairment of sources of capital; exposure to product liability and
other types of litigation; changes in international, federal or state laws and
regulations; changes in relationships with strategic partners and reliance on
strategic partners for the performance of critical activities under
collaborative arrangements; changes in accounting practices or interpretation of
accounting requirements; equipment failures and ability to obtain needed raw
materials and components; and general business and economic conditions. These
and other factors that could cause the forward-looking statements to be
materially different are described in greater detail in the Section entitled,
"Risk Factors," and elsewhere in this Report. Although forward-looking
statements help to provide complete information about future prospects, they may
not be reliable. The forward-looking statements are made as of the date of this
Report and Orasure Technologies undertakes no duty to update these statements.
RISK FACTORS
The following is a discussion of certain significant risk factors that could
potentially affect the Company's financial condition, performance and prospects.
Competing Products
- ------------------
The diagnostic industry is focused on the testing of biological specimens in a
laboratory or at the point-of-care and is highly competitive and rapidly
changing. The Company's principal competitors have considerably greater
financial,
16
technical, and marketing resources. As new products enter the market, the
Company's products may become obsolete or a competitor's products may be more
effective or more effectively marketed and sold than the Company's. If OraSure
Technologies fails to maintain and enhance its competitive position, its
customers may decide to use products developed by competitors which could result
in a loss of revenues.
Ability to Develop New Products
- -------------------------------
In order to remain competitive, the Company must commit substantial resources
each year to research and development. The research and development process
generally takes a significant amount of time from inception to commercial
product launch. This process is conducted in various stages, and during each
stage there is a substantial risk that the Company will not achieve its goals
and will have to abandon a product in which it has invested substantial amounts.
The Company expects to continue to incur significant costs in its research and
development activities. Moreover, there can be no assurance that OraSure
Technologies will succeed in its research and development efforts. If the
Company fails to develop commercially successful products, or if competitors
develop more effective products or a greater number of successful new products,
customers may decide to use products developed by the Company's competitors,
which would result in a loss of revenues.
Market Acceptance of Oral Fluid Testing Products
- ------------------------------------------------
The Company has made significant progress in gaining acceptance of oral fluid
testing for HIV in the insurance and public health markets. The Company also
expects that oral fluid testing for drugs of abuse will be accepted in the
workplace and criminal justice testing markets. Other markets, particularly the
physician office market, may resist the adoption of oral fluid testing as a
replacement for other testing methods in use today. There can be no assurance
that the Company will be able to expand use of its oral fluid testing products
in these or other markets.
Loss or Impairment of Sources of Capital
- ----------------------------------------
Although the Company has made significant progress in the past toward
controlling expenses and increasing product revenue, the Company has
historically depended to a substantial degree on capital raised through the sale
of equity securities to fund its operations. The Company's future liquidity and
capital requirements will depend on numerous factors, including the costs and
timing of the expansion of manufacturing capacity, the success of product
development efforts, the costs and timing of expansion of sales and marketing
activities, the extent to which existing and new products gain market
acceptance, competing technological and market developments, and the scope and
timing of strategic acquisitions. If additional financing is needed, the Company
may seek to raise funds through the sale of equity securities. There can be no
assurance that financing through the sale of equity securities, or otherwise,
will be available on satisfactory terms, if at all.
Ability of the Company to Develop Product Distribution Channels
- ---------------------------------------------------------------
The Company has marketed many of its products by collaborating with diagnostic
companies and distributors. For example, the Company's OraSure Western Blot
confirmatory tests are distributed through Organon Teknika, and the OraSure
collection device is distributed to the insurance industry through major
insurance testing laboratories. The Company's sales depend to a substantial
degree on its ability to develop product distribution channels and on the
marketing abilities of the companies with which it collaborates. There can be no
assurance that such companies will continue to be able to distribute the
Company's products or that new distribution channels will be available on
satisfactory terms.
Ability to Obtain and Timing of Regulatory Approvals
- ----------------------------------------------------
The Company is subject to strict government controls on the development,
manufacture, labeling, distribution and marketing of its products. The Company
often must obtain and maintain regulatory approval for a product from a
country's national health or drug regulatory agency before the product may be
sold in a particular country. The submission of an application to a regulatory
authority does not guarantee that it will grant a license to market the product.
Each authority may impose its own requirements and delay or refuse to grant
approval, even though a product has been approved in another country.
17
In the Company's principal markets, the approval process for a new product can
be complex and lengthy. The time taken to obtain approval varies depending on
the nature of the application and may result in the passage of a significant
period of time from the date of application. This increases the cost of
developing new products and increases the risk that the Company will not succeed
in introducing or selling them.
In addition, the European Union has established a requirement that diagnostic
medical devices used to test biological specimens must receive regulatory
approval known as a CE mark by December 2003. After that date, export to the
European community of products without the CE mark will be stopped or delayed
until the mark is received. This requirement will affect many of OraSure
Technologies' products. OraSure Technologies will not be permitted to make
European sales of its products for which a CE mark is not obtained by December
2003, which could lead to the termination of strategic alliances for sales of
those products in Europe. While the Company intends to apply for CE marks for
certain of its existing and future products, and is not aware of any material
reason why such approvals will not be granted, there can be no assurance that a
CE mark will be received prior to the deadline.
Regulatory Compliance
- ---------------------
The Company can manufacture and sell many of its products, both in the United
States and in some cases abroad, only if it complies with regulations of
government agencies such as the FDA. The Company has implemented quality
assurance and other systems that are intended to comply with applicable
regulations. The FDA has issued warning letters and a letter of intent to revoke
the Company's license with respect to the Serum Western Blot product, stating
that the Company is not in compliance with the FDA's regulations. The Company
has responded to each of these letters. Although the Company believes that it
has satisfactorily addressed the points raised by the FDA, the FDA could force
the Company to stop manufacturing products if the FDA concludes that the Company
remains out of compliance with applicable regulations. In addition, until the
FDA agrees that the Company has resolved all points raised in the letters, the
Company may not be able to obtain regulatory clearance certificates needed in
certain foreign countries. See the Section entitled "Government Regulation" for
a further discussion of regulatory compliance matters.
Changes in Federal or State Law or Regulations
- ----------------------------------------------
As described more fully above under "Government Regulation," many of the
Company's proposed and existing products are subject to regulation by the FDA
and other governmental agencies. The process of obtaining required approvals
from these agencies varies according to the nature of and uses for the product
and can involve lengthy and detailed laboratory and clinical testing, sampling
activities, and other costly and time-consuming procedures. Changes in
government regulations could require the Company to undergo additional trials or
procedures, or could make it impractical or impossible for the Company to market
its products for certain uses, in certain markets, or at all. Other changes in
government regulations, such as the adoption of the FDA's Quality System
Regulation, may not affect the Company's products directly but may nonetheless
adversely affect the Company's financial condition and results of operations by
requiring that the Company incur the expense of changing or implementing new
manufacturing and control procedures.
Ability to Market New Products
- ------------------------------
OraSure Technologies' future success will depend partly on the market
acceptance, and the timing of such acceptance, of recently introduced products
such as the Intercept oral fluid drug test service, the OraQuick rapid oral
fluid test, products currently under development such as UPlink and other
products using up-converting phosphor technology, and other new products or
technologies that may be developed or acquired and introduced in the future. To
achieve market acceptance, OraSure Technologies must make substantial marketing
efforts and spend significant funds to inform potential customers and the public
of the perceived benefits of these products. The Company currently has limited
evidence on which to evaluate the market reaction to products that may be
developed, and there can be no assurance that any products will meet with market
acceptance and fill the market need that is perceived to exist.
18
Reliance on Patents and Other Proprietary Rights
- ------------------------------------------------
The diagnostics industry places considerable importance on obtaining patent,
trademark, and trade secret protection, as well as other intellectual property
rights, for new technologies, products and processes. The Company's success
depends, in part, on its ability to develop and maintain a strong intellectual
property portfolio for products and technologies both in the United States and
in other countries. Litigation or other legal proceedings may be necessary to
defend against claims of infringement or to enforce intellectual property
rights, and could result in substantial costs and diversion of resources.
As appropriate, the Company intends to file patent applications and obtain
patent protection for its proprietary technology. These patent applications and
patents will cover, as appropriate, compositions of matter for the Company's
products, methods of making those products, methods of using those products, and
apparatus relating to the use or manufacture of those products. The Company will
also rely on trade secrets, know-how and continuing technological advancements
to protect its proprietary technology. The Company has entered, and will
continue to enter, into confidentiality agreements with its employees,
consultants, advisors and collaborators. However, these parties may not honor
these agreements and the Company may not be able to successfully protect its
rights to unpatented trade secrets and know-how. Others may independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's trade secrets and know-how.
Many of the Company's scientific and management personnel were previously
employed by competing companies. Although the Company encourages and expects all
of these types of employees to abide by any confidentiality agreement with a
prior employer, competing companies may allege trade secret violations and
similar claims against OraSure Technologies.
To facilitate development and commercialization of a proprietary technology
base, the Company may need to obtain licenses to patents or other proprietary
rights from other parties. If the Company is unable to obtain these types of
licenses, the Company's product development and commercialization efforts may be
delayed.
The Company may collaborate with universities and governmental research
organizations which, as a result, may acquire part of the rights to any
inventions or technical information derived from collaboration with them.
The Company may incur substantial costs in asserting or protecting its
intellectual property rights, or in defending suits against it related to
intellectual property rights. Disputes regarding intellectual property rights
could substantially delay product development or commercialization activities.
Disputes regarding intellectual property rights might include state or federal
court litigation as well as patent interference, patent reexamination, patent
reissue, or trademark opposition proceedings in the United States Patent and
Trademark Office. Opposition or revocation proceedings could be instituted in a
foreign patent office. An adverse decision in any proceeding regarding
intellectual property rights could result in the loss of the Company's rights to
a patent, an invention, or trademark.
Patent Issues Affecting OraQuick
- --------------------------------
There are factors that will affect the specific countries in which the Company
will be able to sell its OraQuick rapid HIV-1/2 test and therefore the overall
sales potential of the test. One factor is whether the company can arrange a
sublicense or distribution agreement related to patents for detection of the
HIV-2 virus. HIV-2 is a type of the HIV virus estimated to represent less than
2% of known HIV cases worldwide. Nevertheless, HIV-2 is considered to be an
important component in the testing regimen for HIV in many markets. HIV-2
patents are in force in most of the countries of North America and Western
Europe, as well as in Japan, Korea, South Africa and Australia. Access to a
license for one or more HIV-2 patents may be necessary to sell HIV-2 tests in
countries where such patents are in force, or to manufacture in countries where
such patents are in force and then sell into non-patent markets. Since HIV-2
patents are in force in the United States, the Company may be restricted from
manufacturing its OraQuick rapid HIV test in the United States and selling into
other countries, even if there were no HIV-2 patents in those other countries.
19
The importance of HIV-2 differs by country, and can be affected by both
regulatory requirements and by competitive pressures. In most countries, any
product used to screen the blood supply will require the ability to detect
HIV-2, although the OraQuick rapid HIV test has not been intended for that
market purpose. In other markets, including the United States, a test that can
detect only the more prevalent HIV-1 type is generally considered sufficient,
except in testing related to blood supply. Because the competitive situation in
each country will be affected by the availability of other testing products as
well as the country's regulatory environment, the Company may be at a
competitive disadvantage in some markets without an HIV-2 product even if HIV-2
detection is not required by regulations.
Another factor that may affect the specific countries in which the Company will
be able to sell its OraQuick rapid HIV test, and therefore the overall sales
potential, concerns whether the Company can arrange a sublicense or distribution
agreement related to any patents which claim lateral flow assay methods and
devices covering the OraQuick rapid HIV test or its use. The OraQuick rapid HIV
test is an analyte-specific lateral flow assay device. There are numerous
patents in the United States and other countries which claim lateral flow assay
methods and devices that are analyte independent. Some of these patents broadly
cover the technology used in the OraQuick assay and are in force in the United
States and other countries. The Company would also not be able to make the
OraQuick rapid HIV test in the United States and sell it in countries where
there is no patent on the device. The Company has licenses under several lateral
flow patents and is considering the need for licenses under others. In the event
that it is not possible to negotiate a license agreement under a necessary
patent, the Company may be able to modify the OraQuick rapid HIV test such that
a license would not be necessary. However, this alternative could delay
introduction of the OraQuick rapid HIV test into the U.S. and other markets.
History of Losses and Projected Profitability
- ---------------------------------------------
The Company has not achieved profitability, but expects to be profitable during
the second half of 2001 and for the year 2001. The Company incurred net losses
of approximately $12.7 million and $4.2 million in 2000 and 1999, respectively,
and as of December 31, 2000, the Company had an accumulated deficit of
approximately $122.4 million. The Company's limited combined operating history
makes it difficult to forecast future operating results. In order to achieve
profitability in the estimated time period, the Company's revenue will have to
continue to grow at the estimated rates. The Company's ability to reach its
estimated revenue growth will be dependent upon a number of factors, including
without limitation achieving growth in international markets through the
Company's OraQuick rapid HIV test, creating market acceptance for the Intercept
drugs of abuse products, and commercially developing, obtaining regulatory
approval, and creating market acceptance for UPT and other products in a time
frame consistent with the Company's objectives. The Company has not yet fully
achieved these objectives. In the event that the Company cannot create a
significant commercial market for its OraQuick test, the Intercept and UPT
products or its other products, or to the extent other events described in this
Section entitled "Risk Factors" occur, the Company's revenue, and consequently
profitability, could be lower than estimated.
Loss of Key Personnel
- ---------------------
The Company's success will depend to a large extent upon the contributions of
its executive officers, management, and scientific staff. The Company may not be
able to attract or retain qualified employees in the future due to the intense
competition for qualified personnel among other medical products businesses. If
the Company is not able to attract and retain the necessary personnel to
accomplish its business objectives, the Company may experience constraints that
will adversely affect its ability to meet the demands of its strategic partners
in a timely fashion or to support internal research and development programs. In
particular, product development programs depend on the ability to attract and
retain highly skilled scientists, including molecular geologists, biochemists
and engineers. Recruiting qualified personnel can be an intensely competitive
and time-consuming process. Although OraSure Technologies believes it will be
successful in attracting and retaining qualified personnel, competition for
experienced scientists and other technical personnel from numerous companies and
academic and other research institutions may limit its ability to do so on
acceptable terms. All of the Company's employees, other than a few senior
officers who have employment agreements, are at-will employees, which means that
either the employee or OraSure Technologies may terminate their employment at
any time. If the Company experiences difficulty in recruiting and retaining
qualified personnel, and in particular scientific personnel, it may need to
provide higher
20
compensation to such personnel than currently anticipated or the Company may
incur additional expenses for the recruitment of qualified personnel.
The Company's business plans will require additional expertise in specific
industries and areas applicable to the development efforts related to
up-converting phosphor technologies. These activities will require the addition
of new personnel, including management, and the development of additional
expertise by existing management personnel. The inability to acquire these
services or to develop this expertise could impair the development, if any, of
products related to these technologies.
International Marketing and Manufacturing
- -----------------------------------------
The Company intends to devote significant resources to increase international
sales of its OraQuick and UPT products. However, in the past, it has not had
significant direct experience with the governmental regulatory agencies in
foreign countries that control sale of products into those countries. In
addition to economic and political issues, a number of factors can slow or
prevent international sales, or substantially increase the cost of international
sales, including those set forth below:
o Regulatory requirements may slow, limit, or prevent the offering of
products in foreign jurisdictions;
o Cultural and political differences may make it difficult to effectively
market, sell and gain acceptance of products in foreign jurisdictions;
o Inexperience in international markets may slow or limit the Company's
ability to sell products in foreign countries;
o Exchange rates, currency fluctuations, tariffs and other barriers,
extended payment terms and dependence on and difficulties in managing
international distributors or representatives may affect the Company's
revenues even when product sales occur;
o The creditworthiness of foreign entities may be less certain and
accounts receivable collection may be more difficult;
The Company recently entered into a contract for the manufacture and supply of
the OraQuick HIV-1/2 device in Thailand. However, the Company does not have
significant direct experience with the use of international manufacturers.
Factors such as economic and political conditions and foreign regulatory
requirements may slow or prevent the manufacture of the Company's products in
countries other than the United States Interruption of the supply of the
Company's products could reduce revenues or cause the Company to incur
significant additional expenses in finding an alternative source of supply.
Product Liability Exposure
- --------------------------
The Company may be held liable if any of its products, or any product which is
made with the use or incorporation of any of the technologies belonging to the
Company, causes injury of any type or is found otherwise unsuitable during
product testing, manufacturing, marketing or sale. Although the Company has
obtained product liability insurance, this insurance may not fully cover
potential liabilities. As new products come to market, the Company may need to
increase its product liability coverage. Inability to obtain sufficient
insurance coverage at an acceptable cost or otherwise to protect against
potential product liability claims could affect the Company's decision to
commercialize products developed by OraSure Technologies or its strategic
partners. If the Company is sued for any injury caused by its products, its
liability could exceed its total assets.
Ability to Commercialize UPT
- ----------------------------
The Company's up-converting phosphor technology is new and is in the early stage
of development. Commercial development of UPT may not be successful. Successful
products require significant development and investment,
21
including testing, to demonstrate their cost-effectiveness or other benefits
prior to their commercialization. In addition, regulatory approval must be
obtained before most products based upon UPT may be sold. Additional development
efforts on these products will be required before any regulatory authority will
review them. Regulatory authorities may not approve these products for
commercial sale. Accordingly, because of these uncertainties, products based
upon UPT may not be commercialized. The failure to develop UPT products with
commercial potential would negatively affect OraSure Technologies' future
revenues.
Dependence on Strategic Partners
- --------------------------------
Although the Company intends to pursue some product opportunities independently,
opportunities that require a level of investment for development and
commercialization may necessitate involving one or more strategic partners. In
particular, the Company's strategy for development and commercialization of UPT
and certain other products may entail entering into additional arrangements with
corporate partners, universities, research laboratory licensees, and others. If
OraSure Technologies is not able to enter into such arrangements, the Company
may be required to transfer material rights to such strategic partners,
licensees, and others. While the Company expects that its current and future
partners, licensees, and others have and will have an economic motivation to
succeed in performing their contractual responsibilities, the amount and timing
of resources to be devoted to these activities will be controlled by others.
Consequently, there can be no assurance that any revenues or profits will be
derived from such arrangements.
Dependence on Third Party Licenses and Rights
- ---------------------------------------------
The Company has licensed the worldwide rights to up-converting phosphor
compositions, methods, and apparatuses for use in diagnostic applications, which
are the subject of seven issued United States patents, and of one pending U.S.
patent application. Corresponding patents and patent applications have been
granted or issued in numerous foreign countries, including, for example,
European countries, Japan, and Canada. OraSure Technologies cooperates with the
licensor to prosecute such patent applications and protect such patent rights.
Failure by the licensor to prosecute such applications and protect such patent
rights could harm the Company's business. If the licensors do not meet their
obligations under the license agreements or do not reasonably consent to
sublicenses by the Company, or if the license agreement is terminated, the
Company could lose the opportunity to develop UPT.
The previous discussion of the Company's business should be read in conjunction
with the Financial Statements and accompanying notes included in Item 14 of this
Annual Report on Form 10-K.
ITEM 2. PROPERTIES.
On April 30, 1999, the Company signed a five-year lease to rent 25,845 square
feet of space at the John M. Cook Technology Center on the south side of
Bethlehem, Pennsylvania located at 150 Webster Street, which the Company uses as
its main corporate, sales and marketing, and research and development offices.
Annual rent for the first five years of this lease is approximately $270,000.
The lease also includes a five-year renewal option and a ten-year purchase
option.
The Company owns 33,500 square feet on 3.4 acres of land at 1745 Eaton Avenue in
Bethlehem, Pennsylvania which is used for manufacturing, engineering,
information systems and accounting activities. The Company rents additional
warehouse space on an as-needed basis. The Company leases space for a sales
office in Reeuwijk, The Netherlands.
The Company leases approximately 30,500 square feet of office, manufacturing,
and laboratory space in Beaverton, Oregon, under a lease that expires on January
31, 2005. The Company has base lease obligations under the lease, which escalate
during the term of the lease and average approximately $375,000 per year. The
Company also leases 2,265 square feet of warehouse space in Oregon to store
inventory and equipment under a lease expiring September 30, 2002.
The Company believes that its existing facilities are adequate for its current
requirements.
22
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is listed for trading on the National Market tier of
The Nasdaq Stock Market ("NASDAQ") under the symbol OSUR. High and low sales
prices reported by NASDAQ during the periods indicated are shown below. Prices
for quarters ending prior to the Merger, represent the high and low sales prices
reported by NASDAQ for the common stock of the Company's predecessor, Epitope,
which traded under the symbol EPTO.
Sales prices per share
Year ended December 31 2000 1999
---- ----
High Low High Low
First Quarter................... $18.188 $5.563 $8.375 $4.500
Second Quarter.................. 14.375 7.000 6.125 3.688
Third Quarter................... 15.938 9.938 7.500 4.875
Fourth Quarter.................. 13.500 5.563 7.219 4.375
On March 16, 2001, there were 836 holders of record of the Common Stock, and the
closing price of the Common Stock was $6.75 per share. The Company has never
paid any cash dividends, and the Board of Directors does not anticipate paying
cash dividends in the foreseeable future. The Company intends to retain any
future earnings to provide funds for the operation and expansion of its
business.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data of the Company. See Note
1 to the Company's Financial Statements for a discussion of the Merger with
Epitope and STC and change in the fiscal year end of Epitope. The data below for
the years ended September 30, 1997 and 1996 include discontinued operations of
two of Epitope's former subsidiaries, Agritope, Inc. and Andrew and Williamson
Sales, Co. The charge for discontinued operations during these periods includes
the operating losses of these subsidiaries through their disposition dates and
final losses on disposal incurred by Epitope. This information should be read in
conjunction with the Financial Statements and notes thereto included in Item 14
and the information set forth in Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
23
SELECTED FINANCIAL DATA
(In thousands, except per share data)
Year ended Three months
December 31, ended December 31, Year ended September 30,
2000 1999 1999 1998 1997 1996
------------- ---------------- --------- ------- -------- ---------
OPERATING RESULTS:
Revenues $ 28,788 $ 6,822 $ 24,046 $20,444 $ 17,282 $ 13,211
Costs and expenses 42,917 7,105 28,138 22,721 23,295 19,606
Other income (expense), net 1,407 (138) (91) (98) 782 6,158
Loss from continuing
operations before income taxes (12,722) (421) (4,183) (2,374) (5,231) (237)
Loss from continuing
operations (12,747) (471) (4,233) (2,374) (5,231) (267)
Discontinued operations - - - - (18,359) (2,501)
Net loss (12,747) (471) (4,233) (2,374) (23,590) (2,768)
PER SHARE OF COMMON STOCK:
Loss from continuing
operations $ (0.36) $ (0.02) $ (0.14) $ (0.09) $ (0.20) $ (0.01)
Loss from discontinued
operations - - - - (0.70) (0.11)
Net basic and diluted loss (0.36) (0.02) (0.14) (0.09) (0.90) (0.12)
SHARES USED IN PER SHARE
CALCULATIONS: 35,002 30,887 30,597 26,180 26,055 23,253
FINANCIAL POSITION:
Working capital $ 21,495 $ 16,314 $ 16,773 $ 8,725 $12,470 $ 30,096
Total assets 37,736 29,626 30,251 20,783 25,978 40,242
Long-term debt 4,644 5,820 5,820 6,001 4,026 5,077
Accumulated deficit (122,365) (109,618) (109,104) (104,903) (96,837) (73,246)
Stockholders' equity 26,172 18,238 18,592 10,701 17,873 31,676
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Statements below regarding future events or performance are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The Company's actual results could be quite different from those
expressed or implied by the forward-looking statements. Factors that could
affect results are discussed more fully under the Sections entitled
"Forward-Looking Statements" and "Risk Factors" in Item 1 and elsewhere in this
Annual Report on Form 10-K. Although forward-looking statements help to provide
complete information about the Company, readers should keep in mind that
forward-looking statements may not be reliable. Readers are cautioned not to
place undue reliance on the forward-looking statements.
RESULTS OF OPERATIONS - 2000 COMPARED TO 1999
On September 29, 2000, STC Technologies, Inc. ("STC"), a privately held company,
and Epitope, Inc. ("Epitope"), a public company whose stock was traded on the
Nasdaq Stock Market, were merged into the Company (the "Merger"). The Merger was
structured as an all stock transaction valued at $260 million and was accounted
for as a "pooling of interests." The Company is reporting its financial results
for 2000 on a calendar year basis. Epitope previously reported its financial
results on the basis of a fiscal year ending September 30, while STC previously
reported its financial results on a calendar year basis. Immediately prior to
the Merger, Epitope adopted a fiscal year ending December 31 for financial
reporting purposes beginning in 2000. As a result, the Financial Data for 1999
reflects results for the twelve-month periods ended September 30, 1999 and
December 31, 1999 for Epitope and STC, respectively. See Note 1 to the Company's
Financial Statements for a discussion of the Merger and the change in fiscal
year end.
The Merger is expected to leverage the Company's expertise in oral fluid
technology, infectious disease testing and substance abuse testing. By building
upon the complementary product portfolios, technologies and sales
infrastructures of Epitope and STC, the Company intends to open up new markets
in the United States and other countries and strengthen its position in key
markets such as the rapidly expanding point-of-care market. In particular, the
proprietary up-converting phosphor technology contributed by STC has broad
applications for oral fluid testing. With the increased sensitivity and accuracy
of this technology, the Company believes it can continue to expand the menu of
tests available for oral fluid point-of-care testing. This same basic technology
is also expected to be of significant benefit to other medical diagnostic
manufacturers outside the expertise contributed by Epitope and STC. For many of
these additional applications, OraSure Technologies plans to license these other
companies to provide an ongoing revenue stream of license fees and royalties.
25
Comparative results of operations are summarized as follows:
Percentage of
Dollars Total Revenue (%)
------------------- -----------------
(In thousands) Percent
2000 1999 Change (%) 2000 1999
-------- -------- ----------- ------- -----
Revenues
Product $ 28,095 $ 23,148 21 98 96
License and product
development 693 898 (23) 2 4
-------- -------- ------- -----
28,788 24,046 20 100 100
-------- -------- ------- -----
Cost and expenses
Cost of products sold 11,102 9,126 22 39 38
Research and development 10,399 5,591 86 36 23
Sales and marketing 6,932 5,697 22 24 24
Acquired in-process
technology - 1,500 (100) - 6
General and
administrative 6,877 6,224 10 24 26
Merger related expenses 7,607 - N/A 26 -
-------- -------- ------- -----
42,917 28,138 53 149 117
-------- -------- ------- -----
Operating loss (14,129) (4,092) (245) (49) (17)
Interest expense (491) (545) (10) (2) (2)
Interest income 1,316 595 122 5 2
Foreign currency loss (19) (141) (87) - (1)
Gai