Item 2.
|
MANAGEMENTS 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 Federal
securities laws. These may include statements about our expected revenues, earnings/loss per share, net income (loss), expenses, cash flow or other financial performance or developments, clinical trial or development activities, expected regulatory
filings and approvals, planned business transactions, views of future industry, competitive or market conditions, and other factors that could affect our future operations, results of operations or financial position. These statements often 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 that could cause actual performance or results to be materially different from those expressed or implied in these statements include, but are
not limited to: ability to market and sell products, whether through our internal, direct sales force or third parties; ability to manufacture products in accordance with applicable specifications, performance standards and quality requirements;
ability to obtain, and timing and cost of obtaining, necessary regulatory approvals for new products or new indications or applications for existing products; ability to comply with applicable regulatory requirements; ability to effectively resolve
warning letters, audit observations and other findings or comments from the FDA or other regulators; changes in relationships, including disputes or disagreements, with strategic partners or other parties and reliance on strategic partners for the
performance of critical activities under collaborative arrangements; our ability to achieve financial and performance objectives under the HCV collaboration with AbbVie; failure of distributors or other customers to meet purchase forecasts, historic
purchase levels or minimum purchase requirements for our products; impact of replacing distributors; inventory levels at distributors and other customers; ability of DNA Genotek to achieve its financial and strategic objectives and continue to
increase its revenues; ability to identify, complete, integrate and realize the full benefits of future acquisitions; impact of competitors, competing products and technology changes; impact of negative economic conditions, high unemployment and
poor credit conditions; reduction or deferral of public funding available to customers; competition from new or better technology or lower cost products; ability to develop, commercialize and market new products, including the OraQuick
®
In-Home HIV test; market acceptance of oral fluid testing or other products; changes in market acceptance of products based on product performance or other factors, including changes in Centers
for Disease Control and Prevention (CDC) or other testing guidelines, algorithms or other recommendations; ability to fund research and development and other products and operations; ability to obtain and maintain new or existing product
distribution channels; reliance on sole supply sources for critical products and components; availability of related products produced by third parties or products required for use of our products; history of losses and ability to achieve sustained
profitability; ability to utilize net operating loss carry forwards or other deferred tax assets; volatility of OraSures stock price; uncertainty relating to patent protection and potential patent infringement claims; uncertainty and costs of
litigation relating to patents and other intellectual property; availability of licenses to patents or other technology; ability to enter into international manufacturing agreements; obstacles to international marketing and manufacturing of
products; ability to sell products internationally, including the impact of changes in international funding sources and testing algorithms; adverse movements in foreign currency exchange rates; loss or impairment of sources of capital; ability to
attract and retain qualified personnel; exposure to product liability and other types of litigation; changes in international, federal or state laws and regulations; customer consolidations and inventory practices; equipment failures and ability to
obtain needed raw materials and components; the impact of terrorist attacks and civil unrest; and general political, business and economic conditions. These and other factors are discussed more fully in our Securities and Exchange Commission
(SEC) filings, including our registration statements, Annual Report on Form 10-K for the year ended December 31, 2013, Quarterly Reports on Form 10-Q, and other filings with the SEC. Although forward-looking statements help to
provide information about future prospects, readers should keep in mind that forward-looking statements may not be reliable. The forward-looking statements are made as of the date of this Report, and we undertake no duty to update these statements.
The following discussion should be read in conjunction with our consolidated financial statements contained herein and the notes thereto, along with
the Section entitled Critical Accounting Policies and Estimates, set forth below.
-16-
Overview
We
develop, manufacture, market and sell oral fluid diagnostic products and specimen collection devices using our proprietary oral fluid technologies, as well as other diagnostic products including immunoassays and other
in vitro
diagnostic
tests that are used on other specimen types. Our diagnostic products include tests that are performed on a rapid basis at the point-of-care and tests that are processed in a laboratory. We sell the OraQuick
®
In-Home HIV test, the first and only rapid point-of-care HIV test approved for use in the domestic consumer retail market. We also manufacture and sell oral fluid collection devices used to
collect, stabilize, and store samples of genetic material for molecular testing in the clinical genetic testing, academic research, pharmacogenomics, personalized medicine, and animal genetics markets. Lastly, we manufacture and sell medical devices
used for the removal of benign skin lesions by cryosurgery, or freezing. Our products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations and other public health
organizations, research and academic institutions, distributors, government agencies, physicians offices, and commercial and industrial entities. Our over-the-counter (OTC) HIV and cryosurgery products are sold to retail pharmacies
and mass merchandisers, and our OTC HIV product is also sold to consumers over the internet.
Recent Developments
HCV Co-Promotion Agreement
On June 10, 2014, we
entered into a Master Program Services and Co-Promotion Agreement with AbbVie Bahamas Ltd., a wholly-owned subsidiary of AbbVie Inc. (AbbVie), to co-promote our OraQuick
®
HCV Rapid
Test in the United States. The product will be used to test individuals at-risk for the hepatitis C virus (HCV). We will be responsible for manufacturing and selling the product into all markets.
Under the agreement, we have granted exclusive promotion rights to AbbVie for the OraQuick
®
HCV test
in certain markets and will provide certain additional services in support of HCV testing. In exchange for these exclusive rights and other services we will provide to AbbVie, we will receive up to $75.0 million in aggregate payments over the term
of the agreement, which runs through December 31, 2019. We plan to recognize the payments ratably on a monthly basis over the life of the agreement. As of June 30, 2014, we recognized $775,000 in revenues from payments due from AbbVie. The
first $15.0 million payment was received in July 2014. In addition, if certain performance-based milestones are achieved, we will be eligible to receive additional payments annually ranging from $3.5 to $55.5 million over the life of the agreement
beginning in 2015. The agreement also contains certain termination, indemnification and other provisions typical of agreements of this type. Payments received under this agreement will be recorded as licensing and product development revenue in our
statements of operations.
Drugs-of-Abuse Assay Collaboration Agreements
We continue to make progress under our agreement with Thermo Fisher Scientific (Thermo Fisher) to develop and supply homogenous fully-automated
oral fluid drugs of abuse assays to be used with a new version of our Intercept
®
oral fluid specimen collection device. As a result of this progress, in late June 2014 we issued our final
purchase order for fully-automated assays previously developed under our now terminated collaboration agreement with Roche Diagnostics (Roche). Under the terms of the termination of our Roche collaboration, we received $5.5 million as a
result of the submission of our final purchase order. This payment was recorded as a receivable on our balance sheet and as a reduction of operating expense on our consolidated statement of operations for the second quarter. The $5.5 million payment
was received in July 2014.
Current Consolidated Financial Results
During the six months ended June 30, 2014, our consolidated net revenues were $49.9 million compared to $45.5 million in the six months ended
June 30, 2013. Net product revenues during the six months ended June 30, 2014 increased 9% when compared to the first six months of 2013, primarily due to higher sales of our
OraQuick
®
HCV, Oragene
®
, and cryosurgical systems products. Licensing and product development revenues for the first six months of 2014
increased 63% due to the recognition of $775,000 in exclusivity payments from AbbVie. Licensing and product development revenues for the first six months of 2013 represent royalties related to sales of Mercks OTC cryosurgical wart removal
product.
-17-
Our consolidated net loss for the six months ended June 30, 2014 was $3.1 million, or $0.06 per share,
compared to a net loss of $15.5 million, or $0.28 per share, for the six months ended June 30, 2013. Results for the six months end June 30, 2014 include the $5.5 million payment received pursuant to the termination of our collaboration
agreement with Roche.
Cash used in operating activities for the six months ended June 30, 2014 was $10.4 million, compared to $9.3 million used
during the six months ended June 30, 2013. As of June 30, 2014, we had $80.3 million in cash and short-term investments compared to $93.2 million at December 31, 2013.
Economic Outlook
Many of our customers rely on public
funding provided by federal, state and local governments, and this funding has been and may continue to be reduced or deferred as a result of current economic conditions. These circumstances may adversely impact our customers and suppliers, which,
in turn, could adversely affect their ability to purchase our products or supply us with necessary equipment, raw materials or components. In addition, these circumstances could adversely affect our access to liquidity that may be needed to conduct
or expand our business, conduct future acquisitions or make other discretionary investments.
In 2011, President Obama signed into law the Budget
Control Act of 2011, which was designed to reduce federal spending over the next 10 years by $2.5 trillion. Under that law, certain automatic cuts to discretionary, national defense and Medicare spending (often referred to as Federal sequestration)
have become effective. We cannot predict whether Congress will attempt to suspend or restructure the automatic budget cuts or what other deficit reduction initiatives may be proposed by Congress. Although the full impact of sequestration is
difficult to ascertain, the spending cuts implemented under this new law have adversely affected, and are expected to continue to adversely affect, our customers ability to purchase our products. In addition, other legislative or regulatory
changes may be adopted which could adversely affect our ability to sell our current products or successfully develop and commercialize new products
.
Business Segments
We operate our business within
two reportable segments: our OSUR business, which consists of the development, manufacture and sale of oral fluid diagnostic products, specimen collection devices, and medical devices used for the removal of benign skin lesions by
cryosurgery; and our DNAG or molecular collection systems business, which consists primarily of the development, manufacture and sale of oral fluid collection devices that are used to collect, stabilize, and store samples of genetic
material for molecular testing. OSUR revenues are derived primarily from products sold into the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, public health organizations,
distributors, government agencies, physicians offices, and commercial and industrial entities. Revenues from OSURs OTC products result from sales to retail pharmacies and mass merchandisers and to consumers over the internet. DNAG
revenues result primarily from products sold into the commercial market, which consists of companies and other entities engaged in consumer genetics, clinical genetic testing, pharmacogenomics, personalized medicine, and animal genetic testing, as
well as products sold into the academic research market which consists of research laboratories, universities and hospitals.
Results of Operations
Three months ended June 30, 2014 compared to June 30, 2013
-18-
CONSOLIDATED NET REVENUES
The table below shows the amount of total net product revenues (dollars in thousands) generated by each of our business segments and net revenues from
licensing and product development activities for the three months ended June 30, 2014 and 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Dollars
|
|
|
%
Change
|
|
|
Percentage of Total
Net Revenues
|
|
|
|
2014
|
|
|
2013
|
|
|
|
2014
|
|
|
2013
|
|
OSUR
|
|
$
|
20,730
|
|
|
$
|
19,409
|
|
|
|
7
|
%
|
|
|
78
|
%
|
|
|
80
|
%
|
DNAG
|
|
|
4,896
|
|
|
|
4,654
|
|
|
|
5
|
|
|
|
19
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product revenues
|
|
|
25,626
|
|
|
|
24,063
|
|
|
|
6
|
|
|
|
97
|
|
|
|
99
|
|
Licensing and product development
|
|
|
775
|
|
|
|
274
|
|
|
|
183
|
|
|
|
3
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
26,401
|
|
|
$
|
24,337
|
|
|
|
8
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net revenues increased 8% to $26.4 million in the second quarter of 2014 from $24.3 million in the comparable
period of 2013, primarily as a result of higher sales of our OraQuick
®
HCV, cryosurgical systems, and molecular collection systems products. These increases were partially offset by lower
domestic sales of our OraQuick
®
professional HIV product, OraQuick
®
In-Home HIV test and insurance risk assessment products. Licensing
and product development revenues increased to $775,000 in the second quarter of 2014 from $274,000 in the second quarter of 2013. Licensing and product development revenues for the current quarter represent the recognition of payments from AbbVie
for exclusive promotion rights and certain services we will provide under our HCV collaboration, while second quarter 2013 licensing and product development revenues represent royalties received on sales of Mercks OTC cryosurgical wart removal
product.
Consolidated net revenues derived from products sold to customers outside the U.S. were $7.3 million and $5.4 million, or 28% and 22% of total
net revenues, in the second quarters of 2014 and 2013, respectively. Because the majority of our international sales are denominated in U.S. dollars, the impact of fluctuating foreign currency exchange rates was not material to our total net
revenues.
Net Revenues by Segment
OSUR Segment
The table below shows
the amount of total net revenues (dollars in thousands) generated by our OSUR segment in each of our principal markets and by licensing and product development activities.
|
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Dollars
|
|
|
%
Change
|
|
|
Percentage of Total
Net Revenues
|
|
Market
|
|
2014
|
|
|
2013
|
|
|
|
2014
|
|
|
2013
|
|
Infectious disease testing
|
|
$
|
12,668
|
|
|
$
|
11,966
|
|
|
|
6
|
%
|
|
|
59
|
%
|
|
|
61
|
%
|
Substance abuse testing
|
|
|
2,208
|
|
|
|
2,113
|
|
|
|
4
|
|
|
|
10
|
|
|
|
11
|
|
Cryosurgical systems
|
|
|
4,920
|
|
|
|
4,177
|
|
|
|
18
|
|
|
|
23
|
|
|
|
21
|
|
Insurance risk assessment
|
|
|
934
|
|
|
|
1,153
|
|
|
|
(19
|
)
|
|
|
4
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product revenues
|
|
|
20,730
|
|
|
|
19,409
|
|
|
|
7
|
|
|
|
96
|
|
|
|
99
|
|
Licensing and product development
|
|
|
775
|
|
|
|
274
|
|
|
|
183
|
|
|
|
4
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
21,505
|
|
|
$
|
19,683
|
|
|
|
9
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-19-
Infectious Disease Testing Market
Sales to the infectious disease testing market increased 6% to $12.7 million in the second quarter of 2014 from $12.0 million in the second quarter of 2013,
primarily due to higher sales of our OraQuick
®
HCV test in both domestic and international markets and our OraQuick
®
professional HIV
product in the international market.
The table below shows a breakdown of our total net
OraQuick
®
revenues (dollars in thousands) during the second quarters of 2014 and 2013.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Market
|
|
2014
|
|
|
2013
|
|
|
% Change
|
|
Domestic HIV
|
|
$
|
7,720
|
|
|
$
|
8,088
|
|
|
|
(5
|
)%
|
International HIV
|
|
|
848
|
|
|
|
745
|
|
|
|
14
|
|
Domestic OTC HIV
|
|
|
1,669
|
|
|
|
1,993
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net HIV revenues
|
|
|
10,237
|
|
|
|
10,826
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic HCV
|
|
|
1,221
|
|
|
|
690
|
|
|
|
77
|
|
International HCV
|
|
|
974
|
|
|
|
247
|
|
|
|
294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net HCV revenues
|
|
|
2,195
|
|
|
|
937
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net OraQuick
®
revenues
|
|
$
|
12,432
|
|
|
$
|
11,763
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic OraQuick
®
HIV sales decreased 5% to $7.7 million for the
three months ended June 30, 2014 from $8.1 million for the three months ended June 30, 2013. This decrease was primarily the result of some customer migration to automated 4
th
generation
immunoassay HIV tests performed in a laboratory as recommended under new testing guidelines issued by the CDC. Also contributing to the lower domestic OraQuick
®
HIV sales were changes in
customer ordering patterns. We anticipate that future sales of our professional HIV product will continue to be negatively affected as a result of the CDCs recommended use of automated laboratory-based blood tests and by reductions in
government funding. International sales of our OraQuick
®
HIV test during the second quarter of 2014 increased 14% to $848,000 from $745,000 primarily due to sales in support of a significant
African testing program.
During the second quarter of 2014, we recorded $1.9 million in gross revenues from sales of our OraQuick
®
In-Home HIV test. These revenues were partially offset by $196,000 in customer allowances, including cooperative advertising, cash discounts, and other allowances, which were netted against gross
revenues in accordance with U.S. generally accepted accounting principles. Thus, net revenues from this product were $1.7 million for the second quarter of 2014 as compared to net revenues of $2.0 million in the second quarter of 2013 ($2.1 million
in gross revenues, partially offset by $133,000 of allowances and discounts).
OraQuick
®
In-Home
HIV revenues recorded in the current and prior year periods are not readily comparable due to the December 2013 change in our revenue recognition policy related to this product. Since the product launch in late 2012, revenues had been recognized
upon consummation of a purchase by consumers either in a store or over the internet. In December 2013, as a result of our growing experience with this product and improved ability to estimate potential product returns, we began recognizing revenues
upon shipment of product to the retailers or distributors. Based on available point-of-sale data, consumer purchases declined 1% in the second quarter of 2014 as compared to the second quarter of 2013 which we believe was due to a decrease in
broad-based media advertising.
Sales of our OraQuick
®
In-Home HIV test in both the second
quarter of 2014 and 2013 included approximately $67,000 and $255,000, respectively, of direct sales to public health customers. We anticipate that some public health entities may choose to use a portion of their funding to purchase our OTC product
in lieu of professional rapid HIV testing products.
-20-
Domestic OraQuick
®
HCV sales increased 77% to $1.2
million in the second quarter of 2014 from $690,000 in the second quarter of 2013, primarily due to the addition of new HCV customers and higher sales to current customers who have expanded their HCV testing programs. International OraQuick
®
HCV sales increased 294% to $974,000 in the second quarter of 2014 from $247,000 in the second quarter of 2013, primarily as a result of purchases by a multi-national humanitarian organization
that did not purchase product during the second quarter of 2013. We expect that purchases by this customer will be at a reduced rate over the balance of the year.
We believe our HCV product represents an opportunity for future sales growth, especially as new therapies for treating HCV come to market. We also
expect that sales of our HCV product will be positively impacted as we implement our HCV collaboration with AbbVie. However, demand for our HCV product, particularly in the public health marketplace, has been, and will likely continue to be,
tempered by the limited availability of government funding allocated to HCV testing efforts and the time and effort required to build awareness and demand for rapid HCV testing
.
International orders for both our HIV and HCV products can be sporadic in nature and are often predicated upon the availability of governmental funding, the
impact of competition and other factors. As such, there is no assurance that such sales will continue at the same levels in future periods.
Substance
Abuse Testing Market
Sales to the substance abuse testing market increased 4% to $2.2 million in the second quarter of 2014 from $2.1 million in the
second quarter of 2013, primarily as a result of higher sales of our Intercept
®
drug testing system. The table below shows a breakdown of our total net Intercept
®
revenues (dollars in thousands) generated in each market during the second quarters of 2014 and 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Market
|
|
2014
|
|
|
2013
|
|
|
% Change
|
|
Domestic
|
|
$
|
1,616
|
|
|
$
|
1,342
|
|
|
|
20
|
%
|
International
|
|
|
33
|
|
|
|
98
|
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Intercept
®
revenues
|
|
$
|
1,649
|
|
|
$
|
1,440
|
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Intercept
®
sales for the second quarter of 2014 increased to
$1.6 million compared to $1.3 million for the second quarter of 2013 largely due to the recovery of customers that were previously lost to competition. International Intercept
®
sales decreased
66% to $33,000 in the second quarter of 2014 from $98,000 in 2013 largely due the discontinuance of purchases by our UK distributor who in 2012 began selling its own competing oral specimen collection device. Sales to this distributor were $46,000
in the second quarter of 2013.
Cryosurgical Systems Market
Sales of our cryosurgical systems products (which includes both the physicians office and OTC markets) increased 18% to $4.9 million in the second
quarter of 2014, compared to $4.2 million in the same period of the prior year.
-21-
The table below shows a breakdown of our total net cryosurgical systems revenues (dollars in thousands) generated
in each market during the second quarters of 2014 and 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Market
|
|
2014
|
|
|
2013
|
|
|
% Change
|
|
Domestic professional
|
|
$
|
1,469
|
|
|
$
|
1,497
|
|
|
|
(2
|
)%
|
International professional
|
|
|
229
|
|
|
|
257
|
|
|
|
(11
|
)
|
International OTC
|
|
|
3,222
|
|
|
|
2,423
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cryosurgical systems revenues
|
|
$
|
4,920
|
|
|
$
|
4,177
|
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of our Histofreezer
®
product to physicians offices in the
United States remained relatively flat at $1.5 million in both the second quarters of 2014 and 2013. International sales of Histofreezer
®
decreased slightly to $229,000, compared to $257,000
in the same period of the prior year. Our long-term supply agreement for the Histofreezer
®
product with Koninklijke Utermöhlen, N.V., the party from whom we acquired the Histofreezer
®
business in 1998, terminated in late 2013, and Utermöhlen has indicated that it plans to sell a competing product similar to
Histofreezer
®
. If Utermöhlen is successful in commercializing this product, we believe sales of our Histofreezer
®
product could be
negatively impacted.
Sales of our OTC cryosurgical products during the second quarter of 2014 increased 33% to $3.2 million compared to $2.4 million in
the second quarter of 2013, largely due to higher sales to both our European distributor, Reckitt Benckiser, and our Latin American distributor, Genomma.
Current quarter sales to Reckitt Benckiser increased to $1.7 million, compared to $1.2 million during the second quarter of 2013, primarily due to the launch
of our product into new geographic territories and continued market penetration. Sales to Genomma increased to $1.5 million in the second quarter of 2014 from $1.2 million in the second quarter of 2013 due to customer ordering patterns.
Insurance Risk Assessment Market
Sales to the insurance
risk assessment market decreased 19% to $934,000 in the second quarter of 2014 from $1.2 million in the second quarter of 2013, as a result of continued reduced demand in the domestic life insurance market, as well as the adoption by some
underwriters of a Simplified Issues policy, pursuant to which testing for risk factors is replaced by having applicants respond to a questionnaire about their behaviors.
Licensing and Product Development
Licensing and product
development revenues increased to $775,000 in the second quarter of 2014 from $274,000 in the second quarter of 2013. Licensing and product development revenues in the second quarter of 2014 represent the recognition of payments from AbbVie for
exclusive promotion rights and certain services we will provide under our HCV collaboration. The first such payment of $15.0 million as required by the agreement was received in July 2014. Licensing and product development revenues in the second
quarter of 2013 represent royalties paid on domestic outsales of Mercks OTC cryosurgical wart removal product, pursuant to a license and settlement agreement executed in January 2008. We stopped receiving royalties under this license when
certain of our cryosurgical patents expired in August 2013.
DNAG Segment
Molecular Collection Systems
Net molecular collection
systems revenues, which primarily represent sales of our Oragene
®
product line, increased 5% to $4.9 million in the second quarter of 2014 from $4.7 million in the second quarter of 2013.
Sales of Oragene
®
in the commercial market remained flat at $2.8 million in both periods. Revenues in the second quarter of 2014 did not include any sales to DNAGs largest commercial
customer, whereas revenues in the second quarter of 2013 included approximately $1.7 million in sales to this customer. Sales of Oragene
®
in the academic market increased 12% largely due to
the timing of orders placed by our distributors and studies performed by several larger academic customers.
-22-
CONSOLIDATED OPERATING RESULTS
Consolidated gross margin was 61% for the second quarter of 2014 compared to 60% for the second quarter of 2013. Gross margin for the current quarter
primarily benefited from a more favorable product mix driven largely by increased DNAG sales to higher margin customers.
Consolidated operating income
for the second quarter of 2014 was $2.5 million, an $8.1 million improvement from the $5.6 million operating loss reported in the second quarter of 2013. The second quarter 2014 operating income was primarily the result of the $5.5 million payment
received under the terms of the termination of our drug assay collaboration with Roche. Also contributing to this improvement in operating performance were increased revenues and lower HIV OTC marketing costs during the current quarter.
OPERATING INCOME (LOSS) BY SEGMENT
OSUR Segment
OSURs gross
margin was 58% in the second quarter of 2014 compared to 59% in the second quarter of 2013. OSURs 2014 margin was negatively impacted by less efficient manufacturing, a shift in product mix to sales of product with lower gross margin partially
offset by higher licensing and product development revenues.
Research and development expenses increased slightly to $2.1 million in the second quarter
of 2014 from $2.0 million in the second quarter of 2013 largely due to higher supply costs. Sales and marketing expenses decreased 21% to $8.4 million in the second quarter of 2014 from $10.7 million in the second quarter of 2013. This decrease was
primarily the result of lower advertising and promotional costs for our OraQuick
®
In-Home HIV test which totaled $3.0 million in the second quarter of 2014, compared to $5.4 million in second
quarter of 2013. This reduction was the result of our decision to focus our marketing and promotional efforts at the retail outlet level and transition away from broad-based consumer advertising by the end of the second quarter of 2014. General and
administrative expenses increased 21% to $5.2 million in the second quarter of 2014 from $4.3 million in the second quarter of 2013 due to higher legal expenses, staffing related costs and consulting costs.
All of the above, along with the $5.5 million payment from Roche, contributed to OSURs second quarter 2014 operating income of $2.2 million, which
included non-cash charges of $790,000 for depreciation and amortization and $1.4 million for stock-based compensation.
DNAG Segment
DNAGs gross margin was 72% in the second quarter of 2014 compared to 62% in the second quarter of 2013. This increase was directly
attributable to an increased volume of high margin sales experienced in the second quarter of 2014 when compared to the second quarter of 2013.
DNAG
operating expenses increased to $3.3 million in the second quarter of 2014 from $3.0 million in the second quarter of 2013. Research and development expenses remained relatively flat at $623,000 in the second quarter of 2014 compared to $655,000 in
the second quarter of 2013. Sales and marketing expenses increased 12% to $1.9 million in the second quarter of 2014 from $1.7 million in the second quarter of 2013 due to higher staffing costs. General and administrative expenses increased to
$761,000 in the second quarter of 2014 compared to $704,000 in the second quarter of 2013, also due to higher staffing costs.
All of the above
contributed to DNAGs second quarter 2014 operating income of $294,000, which included non-cash charges of $779,000 for depreciation and amortization and $109,000 for stock-based compensation.
-23-
CONSOLIDATED INCOME TAXES
We continue to believe the full valuation allowance established in 2008 against OSURs total U.S. net deferred tax asset is appropriate as the facts and
circumstances necessitating the allowance have not changed. As a result, no U.S. income tax expense or benefit was recorded for OSURs pre-tax income or loss in the second quarter of 2014 or 2013, respectively. A Canadian income tax benefit of
$174,000 and $249,000 was recorded in the second quarter of 2014 and 2013, respectively, which was associated with certain Canadian research and development and investment tax credits and DNAGs loss before income taxes. The Canadian income tax
benefits are considered realizable based upon the scheduled reversal of the deferred tax liabilities recorded in connection with the acquisition of DNAG.
Six months ended June 30, 2014 compared to June 30, 2013
CONSOLIDATED NET REVENUES
The table
below shows the amount of total net product revenues (dollars in thousands) generated by each of our business segments and net revenues from licensing and product development activities for the six months ended June 30, 2014 and 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
Dollars
|
|
|
%
Change
|
|
|
Percentage of Total
Net Revenues
|
|
|
|
2014
|
|
|
2013
|
|
|
|
2014
|
|
|
2013
|
|
OSUR
|
|
$
|
38,508
|
|
|
$
|
36,439
|
|
|
|
6
|
%
|
|
|
77
|
%
|
|
|
80
|
%
|
DNAG
|
|
|
10,655
|
|
|
|
8,586
|
|
|
|
24
|
|
|
|
21
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product revenues
|
|
|
49,163
|
|
|
|
45,025
|
|
|
|
9
|
|
|
|
98
|
|
|
|
99
|
|
Licensing and product development
|
|
|
775
|
|
|
|
476
|
|
|
|
63
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
49,938
|
|
|
$
|
45,501
|
|
|
|
10
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net revenues increased 10% to $49.9 million in the first half of 2014 from $45.5 million in the comparable period
of 2013, primarily as a result of higher sales of our OraQuick
®
HCV, molecular collection systems products, and cryosurgical systems products. These increases were partially offset by lower
sales of our OraQuick
®
professional product in the domestic market and lower substance abuse and insurance risk assessment product sales. Licensing and product development revenues increased
to $775,000 in the first six months of 2014 from $476,000 in the first six months of 2013. Licensing and product development revenues for the current six-month period represent the recognition of payments from AbbVie for exclusive promotion rights
and certain services we will provide under our HCV collaboration, while 2013 licensing and product development revenues represent royalties received on sales of Mercks OTC cryosurgical wart removal product.
Consolidated net revenues derived from products sold to customers outside the U.S. were $13.4 million and $10.5 million, or 27% and 23% of total net revenues,
during the six months ended June 30, 2014 and 2013, respectively. Because the majority of our international sales are denominated in U.S. dollars, the impact of fluctuating foreign currency exchange rates was not material to our total net
revenues.
-24-
Net Revenues by Segment
OSUR Segment
The table below shows
the amount of total net revenues (dollars in thousands) generated by our OSUR segment in each of our principal markets and by licensing and product development activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
Dollars
|
|
|
%
|
|
|
Percentage of Total
Net Revenues
|
|
Market
|
|
2014
|
|
|
2013
|
|
|
|
2014
|
|
|
2013
|
|
Infectious disease testing
|
|
$
|
23,732
|
|
|
$
|
22,654
|
|
|
|
5
|
%
|
|
|
60
|
%
|
|
|
61
|
%
|
Substance abuse testing
|
|
|
4,038
|
|
|
|
4,362
|
|
|
|
(7
|
)
|
|
|
10
|
|
|
|
12
|
|
Cryosurgical systems
|
|
|
8,887
|
|
|
|
7,261
|
|
|
|
22
|
|
|
|
23
|
|
|
|
20
|
|
Insurance risk assessment
|
|
|
1,851
|
|
|
|
2,162
|
|
|
|
(14
|
)
|
|
|
5
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product revenues
|
|
|
38,508
|
|
|
|
36,439
|
|
|
|
6
|
%
|
|
|
98
|
|
|
|
99
|
%
|
Licensing and product development
|
|
|
775
|
|
|
|
476
|
|
|
|
63
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
39,283
|
|
|
$
|
36,915
|
|
|
|
6
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infectious Disease Testing Market
Sales to the infectious disease testing market increased 5% to $23.7 million in the first half of 2014 from $22.7 million in the first half of 2013, primarily
due to higher sales of our OraQuick
®
HCV product and OraQuick
®
In-Home HIV test and higher sales of our OraQuick
®
professional HIV product in the international market.
The table below shows a breakdown of our
total net OraQuick
®
revenues (dollars in thousands) during the six months ended June 30, 2014 and 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Market
|
|
2014
|
|
|
2013
|
|
|
%
Change
|
|
Domestic HIV
|
|
$
|
14,339
|
|
|
$
|
15,761
|
|
|
|
(9
|
)%
|
International HIV
|
|
|
1,405
|
|
|
|
1,300
|
|
|
|
8
|
|
Domestic OTC HIV
|
|
|
3,622
|
|
|
|
3,435
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net HIV revenues
|
|
|
19,366
|
|
|
|
20,496
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic HCV
|
|
|
1,884
|
|
|
|
1,119
|
|
|
|
68
|
|
International HCV
|
|
|
1,870
|
|
|
|
486
|
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net HCV revenues
|
|
|
3,754
|
|
|
|
1,605
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net OraQuick
®
revenues
|
|
$
|
23,120
|
|
|
$
|
22,101
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic OraQuick
®
HIV sales decreased 9% to $14.3 million for the
six months ended June 30, 2014 from $15.8 million for the six months ended June 30, 2013. This decrease was primarily caused by our customers migration to automated 4
th
generation
immunoassay HIV tests performed in a laboratory as recommended under new CDC testing guidelines. Also contributing to the lower domestic OraQuick
®
HIV sales were changes in customer ordering
patterns. We anticipate that future sales of our professional HIV product will continue to be negatively affected as a result of the CDCs recommended use of automated laboratory-based blood tests and by reductions in government funding.
International sales of our OraQuick
®
HIV test during the first half of 2014 increased slightly to $1.4 million from $1.3 million in the first half of 2013.
During the first half of 2014, we recorded $4.0 million in gross revenues from sales of our OraQuick
®
In-Home HIV test. These revenues were partially offset by $407,000 in customer allowances, including cooperative advertising, cash discounts, and other allowances, which were netted against gross revenues in accordance with U.S. generally accepted
accounting principles. Thus, net revenues from this product were $3.6 million for the first half of 2014 as compared to net revenues of $3.4 million in the first half of 2013 ($3.7 million in gross revenues, partially offset by $242,000 of
allowances and discounts).
-25-
OraQuick
®
In-Home HIV revenues recorded in the current
and prior year periods are not readily comparable due to the December 2013 change in our revenue recognition policy related to this product. Since the product launch in late 2012, revenues had been recognized upon consummation of a purchase by
consumers either in a store or over the internet. In December 2013, as a result of our growing experience with this product and improved ability to estimate potential product returns, we began recognizing revenues upon shipment of product to the
retailers or distributors. Based on available point-of-sale data, consumer purchases increased 9% in the first half of 2014 as compared to the first half of 2013 due to increased awareness about the product.
Sales of our OraQuick
®
In-Home HIV test in both the first six months of 2014 and 2013 included
approximately $250,000 and $383,000, respectively, of direct sales to public health customers. We anticipate that some public health entities may choose to use a portion of their funding to purchase our OTC product in lieu of professional rapid HIV
testing products.
Domestic OraQuick
®
HCV sales increased 68% to $1.9 million in the first half
of 2014 from $1.1 million in the first half of 2013, primarily due to the addition of new HCV customers and higher sales to current customers who have expanded their HCV testing programs. International OraQuick
®
HCV sales increased 285% to $1.9 million in the first half of 2014 from $486,000 in the first half of 2013, primarily as a result of purchases by a multi-national humanitarian organization which
did not purchase product during the first six months of 2013. We expect that purchases by this customer will be at a reduced rate over the balance of the year.
We believe our HCV product represents an opportunity for future sales growth, especially as new therapies for treating HCV come to market. We also expect that
sales of our HCV product will be positively impacted as we implement our HCV collaboration with AbbVie. However, demand for our HCV product, particularly in the public health marketplace, has been, and will likely continue to be, tempered by the
limited availability of government funding allocated to HCV testing efforts and the time and effort required to build awareness and demand for rapid HCV testing.
International orders for both our HIV and HCV products can be sporadic in nature and are often predicated upon the availability of governmental funding, the
impact of competition and other factors. As such, there is no assurance that such sales will continue at the same levels in future periods.
Substance
Abuse Testing Market
Sales to the substance abuse testing market decreased 7% to $4.0 million in the first six months of 2014 from $4.4 million in the
first six months of 2013, primarily as a result of lower sales of our Intercept
®
drug testing system. The table below shows a breakdown of our total net Intercept
®
revenues (dollars in thousands) generated in each market during the six months ended June 30, 2014 and 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Market
|
|
2014
|
|
|
2013
|
|
|
% Change
|
|
Domestic
|
|
$
|
2,866
|
|
|
$
|
2,745
|
|
|
|
4
|
%
|
International
|
|
|
73
|
|
|
|
356
|
|
|
|
(79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Intercept
®
revenues
|
|
$
|
2,939
|
|
|
$
|
3,101
|
|
|
|
(5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Intercept
®
sales for the first six months of 2014 decreased
to $2.9 million compared to $3.1 million for the first six months of 2013, primarily because of lower international sales. International Intercept
®
sales decreased 79% to $73,000 in the first
half of 2014 from $356,000 in 2013 largely due the discontinuance of purchases by our UK distributor who in 2012 began selling its own competing oral specimen collection device. Sales to this distributor were $283,000 in the first half of 2013.
-26-
Cryosurgical Systems Market
Sales of our cryosurgical systems products (which includes both the physicians office and OTC markets) increased 22% to $8.9 million in the first half of
2014, compared to $7.3 million in the same period of the prior year.
The table below shows a breakdown of our total net cryosurgical systems revenues
(dollars in thousands) generated in each market during the six months ended June 30, 2014 and 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Market
|
|
2014
|
|
|
2013
|
|
|
% Change
|
|
Domestic professional
|
|
$
|
3,011
|
|
|
$
|
2,388
|
|
|
|
26
|
%
|
International professional
|
|
|
538
|
|
|
|
605
|
|
|
|
(11
|
)
|
International OTC
|
|
|
5,338
|
|
|
|
4,268
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cryosurgical systems revenues
|
|
$
|
8,887
|
|
|
$
|
7,261
|
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of our Histofreezer
®
product to physicians offices in the
United States increased 26% to $3.0 million in the first half of 2014, compared to $2.4 million in the first half of 2013. This increase reflects below normal sales in the early months of 2013, resulting from higher distributor purchases in the
fourth quarter of 2012 in advance of a price increase implemented in January 2013. During the first half of 2014, international sales of Histofreezer
®
decreased slightly to $538,000, compared
to $605,000 in the same period of the prior year. Our long-term supply agreement for the Histofreezer
®
product with Koninklijke Utermöhlen, N.V., the party from whom we acquired the
Histofreezer
®
business in 1998, terminated in late 2013, and Utermöhlen has indicated that it plans to sell a competing product similar to Histofreezer
®
. If Utermöhlen is successful in commercializing this product, we believe sales of our Histofreezer
®
product could be negatively
impacted.
Sales of our OTC cryosurgical products during the first six months of 2014 increased 25% to $5.3 million compared to $4.3 million in the first
six months of 2013, largely due to higher sales to both our European distributor, Reckitt Benckiser, and our Latin American distributor, Genomma.
Sales
to Reckitt Benckiser increased to $3.0 million, compared to $2.2 during the first half of 2013, primarily due to the launch of our product into new geographic territories and new market segments. Sales to Genomma increased to $2.2 million in the
first half of 2014 from $1.9 million in the first half of 2013 due to customer ordering patterns.
Insurance Risk Assessment Market
Sales to the insurance risk assessment market decreased 14% to $1.9 million in the first six months of 2014 from $2.2 million in the first six months of 2013,
as a result of continued reduced demand in the domestic life insurance market, as well as the adoption by some underwriters of a Simplified Issues policy, pursuant to which testing for risk factors is replaced by having applicants
respond to a questionnaire about their behaviors.
Licensing and Product Development
Licensing and product development revenues increased to $775,000 in the first half of 2014 from $476,000 in the first half of 2013. Licensing and product
development revenues in 2014 represent the recognition of payments from AbbVie for exclusive promotion rights and certain services we will provide under our HCV collaboration. The first such payment of $15.0 million as required by the agreement was
received in July 2014. Licensing and product development revenues in 2013 represent royalties paid on domestic outsales of Mercks OTC cryosurgical wart removal product, pursuant to a license and settlement agreement executed in January 2008.
We stopped receiving royalties under this license when certain of our cryosurgical patents expired in August 2013.
-27-
DNAG Segment
Molecular Collection Systems
Net molecular collection
systems revenues, which primarily represent sales of our Oragene
®
product line, increased 24% to $10.7 million in the first six months of 2014 from $8.6 million in the first six months of
2013. Sales of Oragene
®
in the commercial market increased approximately 31% in the first half of 2014 primarily as a result of the ordering patterns of a few of our larger commercial
customers. Revenues in the first half of 2014 included approximately $1.3 million in sales to DNAGs largest commercial customer while revenues in the first half of 2013 included approximately $2.4 million in sales to this customer. Sales
of Oragene
®
in the academic market increased 21% largely due to the timing of orders placed by our distributors and studies performed by several larger academic customers.
CONSOLIDATED OPERATING RESULTS
Consolidated gross margin was 60% for the first half of 2014 compared to 58% for the first half of 2013. Gross margin for the current period primarily
benefited from a more favorable product mix driven largely by increased DNAG sales to higher margin customers.
Consolidated operating loss for the first
half of 2014 was $3.1 million, a $13.1 million improvement from the $16.2 million operating loss reported in the first half of 2013. The current period operating results include the $5.5 million payment received under the terms of the termination of
our drug assay collaboration with Roche. Also contributing to this improvement in operating loss were higher revenues and lower HIV OTC sales and marketing costs during the first six months of 2014.
OPERATING INCOME (LOSS) BY SEGMENT
OSUR Segment
OSURs gross
margin was 57% in both the first half of 2014 and 2013.
Research and development expenses decreased 17% to $4.0 million in the first half of 2014 from
$4.8 million in the first half of 2013 largely due to lower clinical trial and staffing costs. Sales and marketing expenses decreased 21% to $17.9 million in the first half of 2014 from $22.8 million in the first half of 2013. This decrease was
primarily the result of lower advertising and promotional costs for our OraQuick
®
In-Home HIV test which totaled $7.6 million in the first half of 2014, compared to $12.3 million in the first
half of 2013. This reduction was the result of our decision to focus our marketing and promotional efforts at the retail outlet level and transition away from broad-based consumer advertising by the end of the first half of 2014. General and
administrative expenses increased 13% to $10.1 million in the first half of 2014 from $8.9 million in the first half of 2013 due to higher legal expenses, staffing related costs and consulting costs.
All of the above, along with the $5.5 million payment from Roche, contributed to OSURs operating loss of $4.2 for the first half of 2014, million, which
included non-cash charges of $1.6 million for depreciation and amortization and $2.7 million for stock-based compensation.
DNAG
Segment
DNAGs gross margin was 72% in the first half of 2014 compared to 65% in the first half of 2013. This increase was directly
attributable to an increased volume of high margin sales experienced in the first half of 2014 when compared to the first half of 2013.
DNAG operating
expenses increased to $6.6 million in the first half of 2014 from $6.2 million in the first half of 2013. Research and development expenses remained relatively flat at $1.3 million in the first half of 2014 and 2013. Sales and marketing expenses
increased 6% to $3.7 million in the first half of 2014 from $3.5 million in the first half of 2013 largely due to higher staffing costs. General and administrative expenses increased 7% to $1.6 million in the first half of 2014 from $1.5 million in
the first half of 2013 also due to higher staffing expenses.
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All of the above contributed to DNAGs operating income of $1.1 million for the first half of 2014, which
included non-cash charges of $1.5 million for depreciation and amortization and $206,000 for stock-based compensation.
CONSOLIDATED
INCOME TAXES
We continue to believe the full valuation allowance established in 2008 against OSURs total U.S. net deferred tax asset is
appropriate as the facts and circumstances necessitating the allowance have not changed. As a result, no U.S. income tax benefit was recorded for OSURs pre-tax loss in the first half of 2014 or 2013. For the six months ended June 30, 2014
and 2013, we recorded Canadian income tax benefits of $43,000 and $659,000, respectively, associated with certain Canadian research and development and investment tax credits and DNAGs loss before income taxes. The Canadian income tax benefits
are considered realizable based upon the scheduled reversal of the deferred tax liabilities recorded in connection with the acquisition of DNAG.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(In thousands)
|
|
Cash
|
|
$
|
75,832
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|
|
$
|
93,191
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|
Working capital
|
|
|
101,098
|
|
|
|
100,590
|
|
Our cash balances decreased $17.4 million to $75.8 million at June 30, 2014 from $93.2 million at December 31, 2013.
Our working capital increased to $101.1 million at June 30, 2014 from $100.6 million at December 31, 2013.
During the first six months of 2014,
we used $10.4 million in cash to finance our operating activities. Our net loss of $3.1 million was partially offset by non-cash stock-based compensation expense of $2.9 million, depreciation and amortization expense of $3.1 million and unrealized
foreign currency loss of $139,000. An additional large use of cash in operating activities included a $6.0 million increase in prepaid expenses and other current assets largely due to the $5.5 million receivable from Roche and the $775,000
exclusivity payment due from AbbVie. Also contributing to the use of cash was a $3.8 million decrease in accrued expenses and other liabilities associated with payment of our 2013 management incentive bonuses, royalty obligations, and certain
year-end accruals, a $1.8 million increase in inventory associated with our infectious disease products, a $1.2 million increase in accounts receivable resulting from the timing of orders during the current quarter, a $418,000 increase in deferred
revenues associated with increased customer prepayments, and a $179,000 decrease in accounts payable.
We used a total of $6.4 million in investing
activities during the first six months of 2014 to purchase $4.4 million in short-term investments and $2.0 million to acquire property and equipment.
Net
cash used in financing activities was $437,000 for the six months ended June 30, 2014, which resulted from the use of $639,000 for the repurchase of common stock related to the vesting of restricted shares, partially offset by $202,000 in
proceeds received from the exercise of stock options.
Our current cash balance is expected to be sufficient to fund our current operating and capital
needs through at least the next twelve months. Our cash requirements, however, may vary materially from those now planned due to many factors, including, but not limited to, the scope and timing of future strategic acquisitions, the progress of our
research and development programs, the scope and results of clinical testing, the cost of any future litigation, the magnitude of capital expenditures, changes in existing and potential relationships with business partners, the timing and cost of
obtaining regulatory approvals, the costs involved in obtaining and enforcing patents, proprietary rights and any necessary licenses, the cost and timing of expansion of sales and marketing activities, market acceptance of new products, competing
technological and market developments, the impact of the current economic environment and other factors.
-29-
Summary of Contractual Obligations
A summary of our obligations to make future payments under contracts existing at December 31, 2013 is included in Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2013. As of June 30, 2014, there were no significant changes to this information, including the
absence of any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
This Managements Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires that we make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our judgments and
estimates, including those related to the valuation of accounts receivable, inventories and intangible assets, as well as calculations related to contingencies and accruals. We base our judgments and estimates on historical experience and on various
other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
A more detailed review of our critical accounting policies is contained in our
2013 Annual Report on Form 10-K filed with the SEC. During the first six months of 2014, there were no material changes in our critical accounting policies.