Our business principally involves the development, manufacture, marketing and
sale of oral fluid diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic products including immunoassays and other
in vitro
diagnostic tests that are used on other specimen types.
We also manufacture and sell medical devices used for the removal of benign skin lesions by cryosurgery or freezing. 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. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations and other public health organizations, distributors, government agencies,
physicians offices, and commercial and industrial entities. One of our diagnostic products, the OraQuick
®
HCV rapid antibody test, is the first and only rapid HCV test approved by the
U.S. Food and Drug Administration (FDA) for sale in the United States. In addition, our OraQuick
®
In-Home HIV test is the first and only rapid HIV test approved by the FDA for sale
in the over-the-counter (OTC) or consumer retail market in the United States and we have commenced sales of our HIV self-test in certain foreign countries. We also sell OTC cryosurgical products to consumers in North America, Europe,
Central and South America, and Australia. More recently, we completed development and recorded initial sales of our new OraQuick
®
rapid Ebola antigen test and we have substantially developed
an OraQuick
®
rapid Zika antibody test.
In vitro
diagnostic testing is the
process of analyzing oral fluid, blood, urine and other bodily fluids or tissue for the presence of specific substances or markers. We have targeted the use of oral fluid in our products as a differentiating factor and believe that it provides a
significant competitive advantage over blood and urine. Our oral fluid tests have sensitivity and specificity comparable to blood and/or urine tests. When combined with their ease of use, non-invasive nature, and cost effectiveness, our oral fluid
tests represent a very competitive alternative to the more traditional testing methods in the diagnostic space.
Through our subsidiary,
DNA Genotek Inc. (DNAG), a company based in Ottawa, Canada, we manufacture and sell kits that are used to collect, stabilize, transport and store samples of genetic material for molecular testing in the consumer genetic, clinical
genetic, academic research, pharmacogenomics, personalized medicine, microbiome and animal genetics markets. Our Oragene
®
DNA sample collection kit provides an all-in-one system for the
collection, stabilization, transportation and storage of DNA from human saliva. We have also begun selling new research use only products into the microbiome and tuberculosis markets and we offer our customers a suite of genomics and microbiome
services called GenoFIND
TM
, which range from package customization and study design optimization to extraction, analysis and reporting services. We serve customers in many countries
worldwide, including many leading research universities and hospitals.
OraSure was formed in May 2000 under Delaware law solely for the
purposes of combining two companies, STC Technologies, Inc. (STC Technologies) and Epitope, Inc. (Epitope), and changing the state of incorporation of Epitope from Oregon to Delaware. STC Technologies and Epitope were merged
into OraSure on September 29, 2000. Our principal offices are located at 220 East First Street, Bethlehem, Pennsylvania 18015, and our telephone number is (610) 882-1820.
Additional information about us can be found on our website,
www.orasure.com
. We make available free of charge through a link provided
at such website our Annual Reports on Form 10-K, our Quarterly Reports on
Form 10-Q,
our Current Reports on Form 8-K and our other filings with the Securities and Exchange Commission (SEC), as
well as any amendments to those Reports and filings. These Reports and filings are made available as soon as reasonably practicable after they are filed or furnished to the SEC. Our Internet website and the information contained in or connected to
that website are not intended to be incorporated by reference into this Annual Report.
3
Products
The following is a summary of our principal products and their regulatory and commercial status:
|
|
|
|
|
|
|
Product
|
|
Description
|
|
Regulatory Status
|
|
Commercial
Status
|
OraQuick
ADVANCE
®
HIV-1/2
|
|
A rapid, point-of-care qualitative test for antibodies to the Human Immunodeficiency Virus Type 1
(HIV-1) and Type 2 (HIV-2 and together with HIV-1,
HIV-1/2)
that can be visually read in approximately 20 minutes.
|
|
Premarket approval (PMA) by the FDA for use with oral fluid, finger-stick and venous whole blood, and
plasma.
|
|
Marketed
|
|
|
|
CE mark (European Union) approved for use with oral fluid, finger-stick and venous whole blood, serum and plasma.
|
|
Marketed
|
|
|
|
|
OraQuick
®
HIV 1/2
(Export Only)
|
|
|
|
CLIA (Clinical Laboratory Improvement Amendments of 1988) waived for use with oral fluid, finger-stick and venous whole
blood.
|
|
Marketed
|
|
|
|
|
|
|
|
|
World Health Organization (WHO) pre-qualification.
|
|
Marketed
|
|
|
|
|
|
|
|
|
Also registered in various other countries.
|
|
Marketed
|
|
|
|
|
OraQuick
®
In-Home HIV Test
|
|
A rapid, point-of-care qualitative oral fluid
HIV-1/2
test for OTC use that can be visually read in approximately 20 minutes.
|
|
PMA approved for OTC use.
|
|
Marketed
|
|
|
|
CE Mark (European Union) approved for OTC use.
|
|
Not Marketed
|
|
|
|
|
OraQuick
®
HIV
Self-Test
|
|
Rapid point-of-care qualitative and oral fluid
HIV-1/2
self-test for investigational use only that can be visually read in approximately 20 minutes.
|
|
Investigational use only.
Registered in one African country.
Designated eligible for procurement by Global Fund.
WHO pre-qualification pending.
|
|
Marketed
|
|
|
|
|
OraQuick
®
HCV
|
|
A rapid, point-of-care qualitative test for antibodies to the
hepatitis C virus (HCV) that can be visually read in approximately 20 minutes.
|
|
PMA approved and CLIA waived for use with venous whole blood and finger-stick whole blood specimens.
|
|
Marketed
|
|
|
CE mark (European Union) approved for use with oral fluid, finger-stick and venous whole blood, serum and plasma. Also
registered in various other countries.
|
|
Marketed
|
|
|
WHO pre-qualification.
|
|
Marketed
|
4
|
|
|
|
|
|
|
Product
|
|
Description
|
|
Regulatory Status
|
|
Commercial
Status
|
OraQuick
®
Ebola
|
|
A rapid point-of-care qualitative test for Ebola antigen that can be
visually read in approximately 30 minutes.
|
|
Emergency Use Authorization (EUA) for use with finger stick and venous whole blood specimens from live
patients.
|
|
Marketed
|
|
|
EUA for use with oral fluid specimens from cadavers.
|
|
Marketed
|
|
|
Emergency Use Assessment and Listing by WHO for whole blood samples and oral fluid
samples from cadavers.
|
|
Marketed
|
|
|
|
|
OraQuick
®
Zika
|
|
A rapid point-of-care qualitative test for Zika antibodies that can be read in
approximately 20 minutes.
|
|
Under development.
|
|
Not Marketed
|
|
|
|
|
OraSure QuickFlu
®
Rapid Flu
A&B Test
|
|
A rapid, point-of-care qualitative test for antibodies to influenza (flu)
Types A and B, including H1N1 infections, with results available in 10 minutes.
|
|
FDA 510(k) cleared for use with nasal swab, nasopharyngeal swab and nasal aspirate/wash.
|
|
Marketed
|
|
|
CLIA waived for use with nasal and nasopharyngeal swabs.
|
|
Marketed
|
|
|
|
|
OraSure
®
|
|
Oral fluid collection device for detection of HIV-1 antibodies, cocaine and
cotinine in a laboratory setting.
|
|
PMA approved for detection of
HIV-1
antibodies with approved laboratory enzyme immunoassay test and registered as a Class I Medical device in the U.S. for detection of cocaine and cotinine.
|
|
Marketed
|
|
|
|
|
Oragene
®
DX
|
|
Non-invasive all-in-one system for the collection, stabilization, transportation
and storage of human DNA from saliva.
|
|
FDA 510(k) cleared for use with FDA-cleared or exempt molecular tests, including OTC
use.
|
|
Marketed
|
|
|
|
|
Oragene
®
DNA
|
|
Non-invasive all-in-one system for the collection, stabilization, transportation,
and storage of human DNA from saliva.
|
|
CE marked and registered as Class 1 Medical Device in Canada.
Registered in various other countries.
|
|
Marketed
|
|
|
|
|
Oragene
®
RNA
|
|
Non-invasive all-in-one system for the collection, stabilization and transportation of RNA from human saliva.
|
|
Research use only product.
|
|
Marketed
|
|
|
|
|
ORAcollect
®
|
|
All-in-one system for the collection, stabilization, transportation,
and storage of human DNA from saliva.
|
|
FDA 510(k) cleared.
|
|
Marketed
|
|
|
CE marked and registered as Class 1 Medical Device.
|
|
Marketed
|
|
|
Registered in various other countries.
|
|
Marketed
|
5
|
|
|
|
|
|
|
Product
|
|
Description
|
|
Regulatory Status
|
|
Commercial
Status
|
|
|
|
|
OMNIgene
®
DISCOVER
|
|
Non-invasive all-in-one system for the collection, stabilization, transportation, and
storage of microbial DNA from saliva.
|
|
Research use only product.
|
|
Marketed
|
|
|
|
|
Performagene
LIVESTOCK and
Oragene
®
ANIMAL
|
|
All-in-one systems for the collection, stabilization, transportation, and storage of
livestock DNA from nasal samples.
|
|
Animal research use only.
|
|
Marketed
|
|
|
|
|
OMNIgene
®
GUT
|
|
All-in-one system for the collection, stabilization, transportation and
storage of microbial DNA in stool samples.
|
|
Research use only product.
|
|
Marketed
|
|
|
CE marked and registered in certain countries.
|
|
Marketed
|
|
|
|
|
OMNIgene
®
SPUTUM
|
|
Reagent for liquefying, decontaminating, transporting and preserving
tuberculosis bacteria in sputum samples.
|
|
Research use only product.
|
|
Marketed
|
|
|
CE marked and registered in certain countries.
|
|
|
|
|
WHO endorsement pending.
|
|
|
|
|
|
|
PrepIT
®
MAX
|
|
Reagent for extraction of DNA from tuberculosis bacteria.
|
|
CE marked and registered in the U.S.
|
|
Marketed
|
|
|
|
|
OMNIgene
®
VAGINAL
|
|
Device for self-collection and stabilization of DNA and RNA from the vagina.
|
|
Research use only.
|
|
Marketed
|
|
|
|
|
OMNIgene
®
ORAL
|
|
Device for self-collection and stabilization of DNA and RNA from the mouth.
|
|
Research use only.
|
|
Marketed
|
|
|
|
|
PrepIT
®
|
|
Reagents for extraction and preparation of DNA from saliva.
|
|
CE marked and registered in the U.S., Canada and various other countries.
|
|
Marketed
|
|
|
|
|
Intercept
®
|
|
Oral fluid collection device for oral fluid drugs-of-abuse
(DOA) testing in a laboratory setting.
|
|
FDA 510(k) cleared for use with nine MICRO-PLATE DOA assays.
|
|
Marketed
|
|
|
CE marked and registered in certain countries.
|
|
Marketed
|
MICRO-PLATE DOA Assays
|
|
Used to detect the following drugs in an oral fluid sample collected with
Intercept
®
device: tetrahydrocannabinol (THC or marijuana), cocaine, opiates, amphetamines, methamphetamines, phencyclidine (PCP), benzodiazepines, barbiturates and
methadone.
|
|
Nine drug assays FDA 510(k) cleared.
|
|
Marketed
|
|
|
Assays CE marked and registered in certain countries.
|
|
Marketed
|
6
|
|
|
|
|
|
|
Product
|
|
Description
|
|
Regulatory Status
|
|
Commercial
Status
|
|
|
|
|
Intercept i2
®
|
|
Oral fluid collection device for oral fluid DOA testing in a laboratory
setting using fully-automated, high-throughput oral fluid DOA assays.
|
|
Forensic use only product.
|
|
Marketed
|
|
|
Generic device CE marked and registered as Class I Medical Device in the U.S.
|
|
Marketed
|
|
|
|
|
Homogeneous DOA Assays
|
|
Fully-automated high-throughput oral fluid DOA assays jointly developed with Thermo
Fisher for use on oral fluid samples collected with an Intercept i2
®
device to detect PCP, opiates, cocaine, methamphetamines amphetamines, and THC.
|
|
Forensic use only.
|
|
Marketed
|
Cryosurgical SystemsProfessional
|
|
Cryosurgical (freezing) system for the removal of warts and other benign
skin lesions, marketed under the Histofreezer
®
tradename primarily to the physicians office market.
|
|
FDA 510(k) cleared for nine types of skin lesions.
|
|
Marketed
|
|
|
CE marked and registered in certain countries.
|
|
Marketed
|
|
|
|
|
Cryosurgical SystemsOTC
|
|
Cryosurgical system for the removal of common and plantar warts and
skin tags, sold in various OTC markets under certain brand names and on a private label basis.
|
|
FDA 510(k) cleared for common and plantar warts.
|
|
Marketed
|
|
|
Registered in Canada for warts and skin tags.
|
|
Marketed
|
|
|
CE marked and registered for warts in certain countries under Scholl Freeze Spray
®
, POINTTS
®
and CrytoTag names.
|
|
Marketed
|
|
|
CE marked for skin tags.
|
|
Marketed
|
In addition to the above products, we sell certain immunoassay tests and reagents for insurance risk
assessment, substance abuse testing and forensic toxicology applications; an oral fluid Western blot HIV-1 confirmatory test for confirming positive HIV-1 test results obtained from the use of our
OraSure
®
collection device; and the FDA 510(k) cleared Q.E.D.
®
rapid point-of-care saliva alcohol test. We also offer genomics and
microbiome support services to our molecular collection customers under the GenoFIND
TM
trademark.
GenoFIND
TM
services range from package customization and study design optimization to
extraction, analysis and reporting services.
OraQuick
®
Rapid HIV Test
OraQuick
®
is our rapid point-of-care test platform designed to test oral fluid, whole
blood (i.e., both finger-stick and venous), plasma and serum samples for the presence of various antibodies or analytes. The device uses a porous flat pad 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 blood, plasma or serum is to be tested, a
7
loop collection device is used to collect a drop of the specimen and mix it in the developer solution, after which the collection pad is inserted into the solution and allowed to develop. In all
cases, the specimen and developer solution then flow through the testing device where test results are observable in approximately 20 minutes. The OraQuick
®
device is a screening test and
generally requires a confirmation test where an initial positive result is obtained.
This product is sold under the OraQuick
ADVANCE
®
name in North America, Europe and certain other countries and under the OraQuick
®
name in other developing countries.
The test has received PMA approval from the FDA for the detection of antibodies to both HIV-1 and HIV-2 in oral fluid, finger-stick whole blood, venous whole blood and plasma. This test is available for use by laboratories located in the United
States certified under the Clinical Laboratory Improvements Amendment of 1988, or CLIA, to perform moderately complex tests. We have also received a CLIA waiver for use of the test with oral fluid and finger-stick and venous whole blood. As a
result, the test can be used by numerous additional sites in the United States not certified under CLIA to perform moderately complex tests, such as outreach clinics, community-based organizations and physicians offices.
On the international front, we have obtained a CE mark for our OraQuick
ADVANCE
®
test so that we can sell this product in Europe and other countries accepting the CE mark for commercialization and this product is registered in other countries. We have
distributors in place for several countries and are seeking to increase awareness and expand our distribution network for this product throughout the world. We have also received WHO pre-qualification for our export only version of this product.
Because of its versatility in being able to detect antibodies to both HIV-1 and HIV-2 in finger-stick and venous whole blood, oral fluid
and plasma samples, we believe that the OraQuick
®
device provides a competitive advantage in the market for rapid HIV testing in the United States and elsewhere.
OraQuick
®
In-Home HIV Test
The OraQuick
®
In-Home HIV test is an over-the-counter oral-fluid only version of our
OraQuick
ADVANCE
®
HIV 1/2 Antibody Test. We received PMA approval to sell this test in the U.S. OTC market. We have also received a CE mark, although this product is not currently
mandated in the European Union. The In-Home test is performed in the same manner as the OraQuick
ADVANCE
®
test, except that it has product labeling and instructions designed for
consumers. In addition, we have established a toll free, 24/7, 365-day per year customer call center to provide additional information and referral support for consumers.
OraQuick
®
HIV Self-Test
We have completed development of a low cost OraQuick
®
HIV Self-Test for use in certain
foreign countries. This product has the same diagnostic capabilities as our U.S. approved OraQuick
®
In-Home HIV test. We are working with Population Services International (PSI), a
leading global health organization, along with UNITAID, the WHO and health officials from Malawi, Zambia and Zimbabwe to launch the UNITAID-PSI HIV Self-Testing in Africa (STAR) project. As part of STAR, PSI is using our new OraQuick
®
Self-Test with labeling and instructions specifically tailored for the African marketplace, in a two-year pilot program funded by UNITAID. The purpose of the STAR project is to generate crucial
information about how best to deliver HIV self-testing, how to generate demand for HIV testing in this manner and what the potential public health impact of self-testing will be. Our OraQuick
®
Self-Test was chosen by PSI because of its quality, ease-of-use and oral fluid option. Initial sales of our test to PSI were completed in 2016.
The OraQuick
®
HIV Self-Test has been designated as eligible for procurement by
purchasing entities entitled to access funding and other resources from the Global Fund and UNITAID. This funding is available for a 12-month period. We are also seeking WHO pre-qualification for this product.
8
OraQuick
®
HCV Rapid Antibody Test
Another test available on the OraQuick
®
platform is the OraQuick
®
HCV rapid antibody test. Like the OraQuick
®
HIV test, this product is a qualitative test that can detect antibodies to the hepatitis C
virus, or HCV, in a variety of sample types. The OraQuick
®
HCV test operates in substantially the same manner as the OraQuick
®
HIV
test.
We have received FDA approval and CLIA waiver for use of the test in detecting HCV antibodies in venous whole blood and
finger-stick whole blood specimens, making it the first and only rapid HCV test approved by the FDA for use in the United States. The OraQuick
®
HCV test has received a CE mark for use with
oral fluid, venous whole blood, finger-stick whole blood, plasma and serum and is sold in Europe. This product is also registered and sold in other foreign countries and has received WHO pre-qualification.
OraQuick
®
Ebola Rapid Antigen Test
In 2015, we completed development of our new rapid Ebola test. This product utilizes the
OraQuick
®
technology platform for the detection of Ebola antigen. This test has received EUAs from the FDA for emergency use by laboratories and facilities adequately equipped, trained and
capable of testing for Ebola infection (including treatment centers and public health clinics) on finger-stick and venous whole blood samples collected from live patients, as well as oral fluid specimens collected from cadavers. The WHO has also
issued an Emergency Use Assessment and Listing for this product with respect to the same specimen types.
OraSure QuickFlu
®
Rapid Flu A&B Test
The OraSure QuickFlu
®
rapid flu A&B test is an FDA 510(k) cleared rapid qualitative test for the detection of influenza (flu) Types A and B, including H1N1 viral infections. The test utilizes specimen collected
with a nasal swab, nasopharyngeal swab or nasal aspirate/wash. A reagent is first inserted into a test cartridge, the specimen is added and the test is allowed to flow. Results are available in as little as ten minutes. This product is manufactured
for us under an agreement with Princeton BioMeditech Corporation (PBM) and is currently sold in certain U.S. markets. During 2016, PBM obtained a CLIA waiver for this test for use with nasal and nasopharyngeal swabs.
OraSure
®
Collection Device
Our OraSure
®
oral fluid collection device is used in conjunction with screening and
confirmatory tests for HIV-1 antibodies. The generic version of this product can be used for other analytes. This device consists of a small, treated cotton-fiber pad on a handle that is placed in a persons mouth for two to five minutes. The
device collects oral mucosal transudate (OMT), a serum-derived fluid that contains higher concentrations of certain antibodies and analytes than saliva. As a result, OMT testing is a highly accurate method for detecting HIV-1 infection
and other analytes.
The OraSure
®
collection device is FDA approved for use in
the detection of HIV-1 antibodies. The generic version is a Class I medical device for the detection of cocaine and cotinine in oral fluid specimens. HIV-1 antibody detection using the
OraSure
®
collection device involves three steps:
|
|
|
Collection of an oral fluid specimen using the
OraSure
®
device;
|
|
|
|
Screening of the specimen for HIV-1 antibodies at a laboratory with an enzyme immunoassay (EIA)
screening test approved by the FDA for use with the OraSure
®
device; and
|
|
|
|
Laboratory confirmation of any positive screening test results with our oral fluid Western blot
HIV-1
confirmatory test (described below).
|
A trained health care professional then
conveys test results and provides appropriate counseling to the individual who was tested.
9
Tuberculosis Products
Our wholly-owned subsidiary, DNAG, offers two infectious disease products targeting tuberculosis (TB). OMNIgene
®
SPUTUM is a non-toxic and highly stable reagent that liquefies and decontaminates sputum samples at the point-of-collection or in the lab while preserving the viability of TB bacteria for
at least eight (8) days at ambient temperatures. Optimized samples are compatible with all routine TB tests, enable cost-effective sample transport and simplify laboratory workflows while eliminating the need for lab reagents that require daily
mixing and quality control. OMNIGENE
®
SPUTUM is expected to improve laboratory and operational workflows compared to current approaches, and improve overall test results. This product
is being offered to TB laboratories for evaluation.
PrepIT
®
MAX is a reagent for
extraction of DNA from TB bacteria. This product is being offered for early stage testing by TB researchers, clinical laboratories, and diagnostic developers who need to extract DNA from TB bacteria for molecular analysis.
Both of the OMNIgene
®
SPUTUM and PrepIT
®
MAX products are CE marked and OMNIgene
®
SPUTUM is gaining greater interest for tuberculosis testing. Healthcare providers
from more than 60 countries have expressed interest in evaluating this product and business entities, ranging from Ministries of Health, non-government organizations, donor agencies and diagnostic test developers, have begun their product
evaluations. Our tuberculosis products are well positioned to support the U.S. governments National Action Plan for combatting multi-drug resistant tuberculosis, by providing much needed solutions to developing countries that are at the
highest risk for multi-drug resistant tuberculosis.
Molecular Collection Systems
Through DNAG, we sell a number of genomic products that provide all-in-one systems for the collection, stabilization, transportation, and
storage of DNA and/or RNA from human and animal biologic samples. Our lead product is sold under the Oragene
®
brand and is used to collect DNA from human saliva. These products are currently
sold to thousands of academic and research customers in many countries worldwide.
Our molecular collection products are available in
several different configurations and contain proprietary chemical solutions that are optimized for the specific application for which each product is designed. Product physical design is focused on ease-of-use and reliability for self or assisted
collection of samples. For example, several of the Oragene
®
products require users to simply hold the product close to their mouth and spit into the collection device. When the container is
closed, the reagents stored in the lid of the container are mixed with the captured saliva and immediately protect the nucleic acids in the sample. This non-invasive collection method yields nucleic acid that remains stable at ambient temperature
for extended periods. The stabilizing technology results in high quality and high quantity nucleic acids that are required for most genetic testing and analysis methods.
We have started to market several microbiome collection products designed to collect, stabilize and transport the microbial profile from
multiple sample types. Unlike genomic DNA, the microbiome of a sample can change over time and when exposed to temperature and environment fluctuations. In order to optimize and standardize sample results, a reliable method that captures and
preserves (snapshots) the microbiome after collection, until analysis is required.
Our OMNIgene
®
GUT product is an all-in-one system designed to enable an individual to easily self-collect high quality microbial DNA from feces or stool samples for gut microbiome profiling for use in
clinical laboratory and research use settings. The product ensures that the fecal sample is fully stabilized immediately upon collection and maintains an accurate and reliable bacterial profile for weeks at room temperature. Current methodologies
for gut microbiome profiling have distinct shortcomings due to the introduction of bias, leading to a lack of reproducibility in the field. We have also begun marketing other microbiome collection kits for DNA or RNA collected from the vagina and
oral cavity.
10
We believe these products provide significant advantages over competing DNA and RNA collection
methods such as blood collection or buccal swabs, particularly in human genetic applications. Benefits include the reliable collection of high quality and stable genetic samples, use of simple non-invasive collection methods, the ability to store
and transport collected samples for extended periods at ambient temperatures and compatibility with fully-automated laboratory testing systems.
Our molecular business also offers customers our GenoFIND
TM
services, a suite of genomic
and microbiome services that range from package customization and study design optimization to extraction, analysis and reporting services. We believe our GenoFIND
TM
offering will become an
increasingly valuable tool for meeting the needs of our molecular customers.
Our molecular collection products historically have been
sold primarily as Class I medical devices for use by research and academic institutions. We have received FDA 510(k) clearance of the Oragene
®
DX product for use with the eSensor
®
Warfarin sensitivity saliva test. A separate 510(k) clearance permits self-collection by consumers when the sample is to be tested with either an exempt or 510(k) cleared molecular test. Our
ORAcollect
®
product similarly received 510(k) clearance from the FDA. We have also received CE mark approval for the Oragene
®
DNA and OMNIgene
®
GUT collection kits.
Intercept
®
Drug Testing System
A collection device that is substantially similar to the
OraSure
®
device is sold by us under the name Intercept
®
, and is used to collect OMT for oral fluid drug testing. We have received FDA
510(k) clearance to use the Intercept
®
collection device with laboratory-based EIAs to test for drugs-of-abuse commonly identified by the National Institute for Drug Abuse (NIDA)
as the NIDA-5 (i.e., tetrahydrocannabinol (THC or marijuana), cocaine, opiates, amphetamines/methamphetamines and phencyclidine (PCP), and for barbiturates, methadone and benzodiazepines. Each of these EIAs is also FDA 510(k)
cleared for use with the Intercept
®
device. Our Intercept
®
device and oral fluid assays are sold in the U.S. primarily through
laboratory distributors.
We believe that the Intercept
®
device has several
advantages over competing urine and other drugs-of-abuse testing products, including its lower total testing cost, its non-invasive nature, mobility and accuracy, the ease of maintaining a chain-of-custody, the treatment of test subjects with
greater dignity, no requirement for specially-prepared collection facilities and difficulty of sample adulteration. The availability of an oral fluid test is intended to allow our customers to test for drug impairment and eliminate scheduling costs
and inconvenience, thereby streamlining the testing process.
During 2014, we completed development of a next generation collection
device, which we are marketing under the tradename Intercept i2
®
he
. This device offers several important advantages over our original Intercept
®
device, including a sample adequacy indicator that provides a visual prompt when the appropriate volume of oral fluid has been collected, the ability to collect a larger sample required by
current laboratory testing protocols and a more optimized chemistry that results in improved recovery of the targeted drug analytes. The Intercept i2
®
device is currently being sold as a
forensic use only device within the criminal justice and drug treatment markets along with a NIDA-5 panel of fully-automated high-throughput oral fluid drug assays that we distribute under an agreement with Thermo Fisher Scientific (Thermo
Fisher).
Cryosurgical Systems (Skin Lesion Removal Products)
The Histofreezer
®
cryosurgical removal system is a low-cost alternative to liquid
nitrogen and other methods for removal of warts and other benign skin lesions by physicians. The Histofreezer
®
product mixes three cryogenic gases in a small aerosol canister. When released,
these gases are delivered to a specially designed foam bud, cooling the bud to a maximum of 50°C to 55°C. The frozen bud is then applied to the wart or lesion for 15 to 40 seconds (depending on the type of lesion) creating
localized destruction of the target area by freezing. We have received 510(k) clearance for use of the Histofreezer
®
product to remove common warts and eight other
11
types of benign skin lesions, and this product has been CE marked and registered for distribution in Canada, throughout Europe and in certain other foreign countries. We also supply this product
on a private label basis for resale by one of our physician office distributors.
Internationally, we sell an OTC cryosurgical product
through our distributor Genomma Labs (Genomma), under the POINTTS
®
tradename, in Mexico and a number of South and Central American countries. We sell a CE marked cryosurgical wart
removal product into the OTC foot care market in Europe, Australia and New Zealand through our distributor, Reckitt Benckiser (Reckitt), under the Scholl and Dr. Scholl trademarks. Reckitt is the owner of the Scholl and
Dr. Scholl trademarks in countries outside North and South America. We also sell OTC cryosurgical products to retailers on a private label basis for the treatment of warts in the U.S., for the treatment of both warts and skin tags in Canada and
for the treatment of skin tags in the U.K.
Immunoassay Tests and Reagents
We develop and sell immunoassay tests in formats, known as MICRO-PLATE and AUTO-LYTE
®
,
to meet the specific needs of our customers. We also sell fully-automated high-throughput oral fluid drug assays developed under our agreement with Thermo Fisher.
In a MICRO-PLATE kit, the sample to be tested is placed into a small plastic receptacle, called 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 reagents by laboratory personnel. Test results are analyzed by any of a variety of commercially available
laboratory instruments, which we may also provide to our laboratory customers. 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.
AUTO-LYTE
®
tests are sold in the form of bottles of liquid reagents. These reagents
are run on commercially available laboratory-based automated analytical instruments, which are manufactured by a variety of third parties. AUTO-LYTE
®
is typically used in high volume,
automated, commercial reference insurance laboratories to detect certain drugs or chemicals in urine. Test results are produced quickly, allowing for high-throughput. Our AUTO-LYTE
®
tests
continue to face strong competition from cheaper home-brew tests developed internally by our laboratory customers. As a result, we may eventually stop selling our AUTO-LYTE
®
tests.
We entered into an agreement with Thermo Fisher in 2013, under which Thermo Fisher has agreed to develop and supply up to 12
fully-automated high-throughput oral fluid drug assays for use with our Intercept i2
®
he
device. Under the first phase of this agreement, we are selling a NIDA-5 panel of assays supplied
by Thermo Fisher in the U.S. forensic market. The parties expect to complete development of several additional assays and pursue FDA 510(k) clearance of the Intercept i2
®
he
device for
use with a 12-assay panel. We also expect to obtain CE mark and other regulatory approvals to enable us to sell our Intercept i2
®
he
collector and Thermo Fisher assays into Europe and
other foreign countries.
The assays from Thermo Fisher will be optimized as needed to comply with new oral fluid guidelines expected to
be issued by the Substance Abuse and Mental Health Services Administration (SAMHSA) for the federally regulated market and certain other markets that follow Federal drug testing guidelines, none of which is currently served by OraSure. We believe
the offering of an Intercept i2
®
device with a full menu of fully-automated high-throughput oral fluid assays will better meet the needs of our laboratory drug testing customers and allow us
to compete more effectively against fully automated urine drug assays that dominate the drug testing market.
Western blot HIV-1 Confirmatory Test
We sell an oral fluid Western blot HIV-1 confirmatory test that received premarket approval from the FDA in 1996. This test uses the
original specimen collected with the OraSure
®
oral fluid collection device to confirm positive results of initial oral fluid HIV-1 EIA screening tests.
12
Q.E.D.
®
Saliva Alcohol Test
Our Q.E.D.
®
saliva alcohol test is a point-of-care test device that is a
cost-effective alternative to breath or blood alcohol testing. The test is a quantitative, saliva-based method for the detection of ethanol, has been cleared for sale by the FDA and has received a CLIA waiver. The U.S. Department of Transportation
(DOT) has also approved the test.
Each Q.E.D.
®
test kit
contains a collection stick that 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 has a testing range of 0 to 0.145% blood alcohol and produces results in approximately two minutes.
Products Under Development
Since
2014, we have been pursuing the development and commercialization of a rapid Ebola antigen test using our OraQuick
®
technology platform. Product development is now largely complete and
significant progress has been made in preparing for the commercial manufacturing of the product and obtaining the required regulatory approvals and registrations. In July 2015, we received an EUA for our OraQuick
®
Ebola rapid antigen test from the FDA. This authorization allows the use of the product for the duration of the U.S. Secretary of the Department of Health and Human Services (HHS)
August 5, 2014 declaration regarding the emergency use of in vitro diagnostic tests for the detection of the Ebola virus. Under this authorization, the test can be used on finger-stick and venous whole blood samples collected from live
patients.
In June 2015, we entered into a contract with the Biomedical Advanced Research Development Authority (BARDA) within
the HHS for up to $10.4 million of funding for our OraQuick
®
Ebola test. The three-year, multi-phased contract included an initial commitment of $1.8 million and options for up to an
additional $8.6 million to fund certain clinical and regulatory activities. In September 2015, BARDA exercised an option to provide $7.2 million of this funding for our OraQuick
®
Ebola
test.
In March 2016, we received an EUA for use of the Ebola test on oral fluid samples collected from cadavers. The WHO has issued an
Emergency Use Assessment and Listing, or EUAL, for use of the product with whole blood samples collected from live patients and with oral fluid samples collected from cadavers. These approvals will allow expanded use of the product, particularly in
Africa. We also intend to seek 510(k) clearance of our Ebola test from the FDA in 2017.
In response to global concerns regarding the Zika
virus, we are developing a rapid Zika antibody test on our OraQuick
®
platform. This virus is believed to be spread primarily through infected mosquitoes and has been linked as a possible cause
of microcephaly in newborn babies whose mothers are infected. There has also been some potential correlation reported with Guillain-Barre syndrome in certain other infected patients.
In August 2016, we entered into a contract with BARDA for up to $16.6 million of funding for our OraQuick
®
Zika test. The six-year, multi-phased contract included an initial commitment of $7.0 million and options for up to an additional $9.6 million to fund the evaluation of additional product
enhancements, and certain clinical and regulatory activities.
Research and Development
In 2016, our research and development activities focused primarily on development of our next generation Intercept i2
®
collection device, our new rapid Ebola and Zika tests, our molecular collection product offerings for the microbiome and tuberculosis markets, and clinical and technical support for our existing
products. From time to time, we have contracted with third parties to conduct research and development activities and we may do so in the future.
13
Research and development expenses were $9.8 million in 2016, $11.7 million in 2015, and $12.1
million in 2014. These expenses include our costs associated with research and development, regulatory affairs, clinical trials and product support.
Sales and Marketing
We attempt to
reach our major target markets through a combination of direct sales, strategic arrangements and independent distributors. Our marketing strategy is to create or raise awareness through a full array of marketing activities, which include trade
shows, print advertising, special programs, distributor promotions, telemarketing and the use of digital and social media in order to stimulate sales in each target market.
We market our products in the United States and internationally. Consolidated net revenues attributable to customers in the United States were
$99.8 million, $96.5 million and $82.3 million in 2016, 2015 and 2014, respectively. Consolidated net revenues attributable to international customers amounted to $28.4 million, $23.2 million and $24.2 million, or 22%, 19% and 23% of our total
revenues, in 2016, 2015 and 2014, respectively. For more information about our revenues and long-lived assets attributable to U.S. and international customers, please see Note 11 to our consolidated financial statements included elsewhere in this
Annual Report.
Infectious Disease TestingProfessional
We market the OraQuick
ADVANCE
®
rapid HIV-1/2 antibody test directly to
customers in the public health market for HIV testing. This market consists of a broad range of clinics and laboratories and includes states, counties, and other governmental agencies, family planning clinics, colleges and universities, correctional
facilities and the military. There are also a number of organizations in the public health market, such as AIDS service organizations and various community-based organizations that are set up primarily for the purpose of encouraging and enabling HIV
testing. We also sell our OraQuick
ADVANCE
®
test directly to hospitals in the U.S. and through distributors into the U.S. physician office market and to retail clinics operated by
pharmacies. We have engaged two manufacturers representative organizations to assist with sales to U.S. physicians and retail clinics. Internationally, we distribute our OraQuick
®
HIV
test in Europe and certain other foreign countries.
Our OraQuick
®
HCV test is
sold primarily to the same markets where our OraQuick
®
ADVANCE HIV test is sold, including public health organizations, hospitals, physicians and retail clinics. We also sell this test in
Europe and other countries through distributors. Under an agreement with AbbVie, we previously co-promoted our OraQuick
®
HCV test in certain U.S. markets, including general practitioners and
certain specialty physicians and AbbVie agreed to detail our OraQuick
®
HCV test in the physician markets. This agreement was terminated at the end of 2016.
We currently sell our OraQuick
®
Ebola test under an EUA and our only customer to date
has been the CDC, which has purchased the product for field testing in Africa. Our ability to expand sales of this test to other customers will likely depend on the availability of government or other funding and whether we are able to obtain FDA
510(k) clearance and pre-qualification with the WHO for our product.
We market the
OraSure
®
oral fluid collection device for HIV-1 testing, on its own and as a kit in combination with laboratory testing services. To better serve our public health customers, we have
contracted a commercial laboratory to provide prepackaged OraSure
®
test kits, with prepaid laboratory testing and specimen shipping costs included. We also sell the OraSure
®
device in the international public health market.
We have distribution rights to an
FDA 510(k) cleared and CLIA waived rapid flu A&B test, which we market under our proprietary OraSure QuickFlu
®
tradename. Under our agreement with the supplier of this product, we are
permitted to sell this product into the U.S. hospital and public health markets.
We have also been working to commercialize the OMNIgene
®
SPUTUM and PrepIT
®
MAX products. TB is a major global health issue, with long established relationships among public health
agencies, NGOs, and
14
suppliers. Our subsidiary, DNAG, has a focused sales and market development team working with these key players to have its products evaluated and adopted where possible.
Infectious Disease TestingOTC
We
sell our OraQuick
®
In-Home test in the U.S. retail or consumer market. Retailers carrying the product include CVS, Walgreens, Rite Aid and Wal-Mart. The product is also available for purchase
on-line through certain retailers and our website,
www.oraquick.com
. The primary target population for our HIV-OTC test is comprised of young, sexually active adults, with greater purchase intent found in high-risk sub-groups, such as men who
have sex with men, African Americans and Latino Americans.
To support individuals that purchase and use our test, we have established a
toll-free customer support center that operates on a 24/7, 365-day per year basis. Through this center, consumers will have access to highly-trained, bi-lingual representatives who can answer questions about HIV/AIDS and the use of our test, and
refer consumers to appropriate resources for follow-up confirmatory testing, counseling and medical treatment.
In 2016, we began selling
our OraQuick
®
HIV Self-Test to PSI (Population Services International) for use in a self-testing pilot program in three African countries, Malawi, Zambia and Zimbabwe. We expect this program
to expand and we are marketing our test in several other countries that are also planning large HIV self-test programs. Our OraQuick
®
HIV Self-Test has the same diagnostic capabilities as our
OraQuick
®
In-Home test and was developed for use in certain foreign countries.
Molecular
Collection Systems
DNAG sells its products directly to its customers, primarily through its own internal sales force. In some
countries distributors are used. Over half of DNAGs employees work in the areas of sales, marketing, business development or product management. The significant majority of employees who deal directly with customers have molecular science
backgrounds, which we believe is useful in selling and marketing molecular collection products, and more importantly, in identifying and evaluating new market and business opportunities.
Most of DNAGs revenues are derived from product sales to commercial customers and into the academic and research markets. Sales to
commercial customers providing consumer genetics and clinical diagnostic services have been increasing and account for a majority of DNAGs revenues. A significant portion of DNAGs sales are derived from repeat customers, in both markets.
DNAG also has a number of established global customers in the livestock market, including breed associations and research institutions.
DNAG has expanded its market focus by developing new collection devices for the emerging microbiome market, which is focused on the study of
microbes and their effect on human health. DNAGs primary product offering, OMNIgene
®
GUT, is focused on the human gut microbiome (microbes living in human stool). DNAG is
leveraging its existing sales force and global research connections to engage microbiome customers around the world to establish itself as the leader in ease-of-collection, stabilization and transport of this challenging sample type.
Substance Abuse Testing
Our substance
abuse testing products are marketed to laboratories serving the workplace testing, forensic toxicology, criminal justice and drug rehabilitation markets in the U.S. and in certain international markets.
We have entered into agreements for the distribution of our Intercept
®
collection
device and associated MICRO-PLATE assays for drugs-of-abuse testing in the workplace testing market in the United States and Canada through several laboratory distributors and internationally for workplace, criminal justice and forensic toxicology
testing through other distributors. We also market the Intercept
®
collection device on its own and as a kit in
15
combination with laboratory testing services. To better serve our workplace customers, we have contracted with commercial laboratories to provide prepackaged Intercept
®
test kits, with prepaid laboratory testing and specimen shipping costs included.
The criminal justice market in the United States for our substance abuse testing products consists of a wide variety of entities in the
criminal justice system that require drug screening, such as pre-trial services, parole and probation offices, police forces, drug courts, prisons, drug treatment programs and community/family service programs. The forensic toxicology market
consists of several hundred laboratories including federal, state and county crime laboratories, medical examiner laboratories and reference laboratories.
As discussed above, we have also launched our next generation Intercept i2
®
collection device with a
NIDA-5
panel of fully-automated high-throughput oral fluid assays developed with Thermo Fisher for the detection of PCP, THC, opiates, cocaine, methamphetamines and amphetamines. These
products are currently sold into the criminal justice and drug treatment markets. We plan to obtain FDA 510(k) clearance of our Intercept i2
®
device for use with the NIDA-5 assay panel,
along with an additional six fully-automated high-throughput assays in order to expand sales of this product line into the workplace testing market and other markets that require 510(k) cleared drug tests. We expect that the 510(k) cleared Intercept
i2
®
device and related fully-automated high-throughput assays will eventually replace our original Intercept
®
collector and MICRO-PLATE
assays in the drug testing market.
We distribute our Q.E.D.
®
saliva alcohol test
primarily through various distributors in the United States and internationally. 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. Typical usage situations include pre-employment, random, post-accident, reasonable-cause and return-to-duty testing.
Cryosurgical Systems
Most of our
Histofreezer
®
sales occur in the United States to distributors that, in turn, resell the product to primary care physicians and podiatrists in the United States. Our major U.S. distributors
include Cardinal Healthcare, McKesson Medical-Surgical, AmerisourceBergen Corporation, and Henry Schein. We have engaged a manufacturers representative organization to help our U.S. distributors promote and sell Histofreezer
®
. We also provide a private label version of our professional Histofreezer
®
product to one of our U.S. distributors. Internationally, we
sell the Histofreezer
®
product through a network of distributors in more than 20 countries worldwide.
We distribute cryosurgical wart removal products in the OTC foot care market in Europe, Australia and New Zealand through our distributor,
Reckitt Benckiser, under its Scholl and Dr. Scholl tradenames, and in the OTC markets in Mexico and several Central and South American countries under the POINTTS tradename through our distributor, Genomma. More recently, we began selling our
product in the U.K. through another distributor, Appia, under the CrytoTag trade name. We also sell OTC private label cryosurgical products for the removal of warts and skin tags in Canada, for the removal of skin tags in the U.K. and for the
removal of warts in the U.S.
Insurance Risk Assessment
We currently market the OraSure
®
oral fluid collection device for use in screening
life insurance applicants in the United States and internationally to test for three of the most important underwriting risk factors: HIV-1, cocaine and cotinine (a metabolite of nicotine). Devices are sold to insurance testing laboratories, which
in turn sell the devices to insurance companies, usually in combination with testing services.
We also promote use of the OraSure
®
device directly to insurance companies for life insurance risk assessment. Insurance companies then make their own decision regarding which laboratory to use to supply their collection
16
devices and testing services. We sell our OraSure
®
Western blot confirmatory test directly to insurance testing laboratories for use in
confirming oral fluid specimens collected with our OraSure
®
device that initially test positive for HIV-1.
There exists a wide range of policy limits where our OraSure
®
product is being used.
In general, many (but not all) of our insurance company customers use the OraSure
®
device in connection with life insurance policies having face amounts of up to $250,000, with some customers
using the device for policies of up to $500,000 in amount. 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 and urine-based testing. In recent years, some insurance customers have adopted a Simplified Issues policy, where lab testing is no longer required and
instead the applicant completes a questionnaire about personal behaviors.
We also sell our AUTO-LYTE
®
assays and reagents in the insurance testing market directly to certain laboratories.
Significant Products and Customers
Several different products have contributed significantly to our financial performance, accounting for 10% or more of our total revenues during
the past three years. The OraQuick
®
rapid HIV testing products, the cryosurgical systems products, and our Oragene
®
product line
accounted for total revenues of $33.1 million, $13.2 million, and $31.1 million, respectively, in 2016, $34.3 million, $11.9 million and $29.4 million, respectively, in 2015, and $38.9 million, $15.5 million and $23.8 million, respectively, in
2014. In 2016, the OraQuick
®
HCV testing products accounted for total revenues of $14.1 million.
One of our customers accounted for approximately 15% of our net consolidated revenues in 2016 and 12% in 2015. We had no individual customers
who accounted for more than 10% of our total revenues in 2014.
Financial Information by Segment
We operate our business within two reportable segments. The first is our OSUR business, which consists of the development,
manufacture and sale of diagnostic products, specimen collection devices, and medical devices. The second is 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
consist primarily of product 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. OSUR also derives revenues from the sale of OTC products to retail pharmacies and mass merchandisers, and to consumers over the internet and from licensing and product development activities. DNAG
revenues consist of product sold into the academic research, consumer genetics, clinical genetic testing, pharmacogenomics, personalized medicine, microbiome and animal genetics markets. For more information about our revenues from external
customers, income and total assets, please see the sections entitled Selected Consolidated Financial Data and Managements Discussion and Analysis of Financial Condition and Results of Operations and Note 11 to the
consolidated financial statements, included elsewhere in this Annual Report on
Form 10-K.
Supply and
Manufacturing
Our OraQuick
ADVANCE
®
HIV test, OraQuick
®
In-Home HIV test, OraQuick
®
HCV test, OraQuick
®
Ebola test, OraSure
®
, Intercept
®
and Intercept i2
®
collection devices, Western blot
HIV-1
confirmatory test, AUTOLYTE and MICRO-PLATE assays and QED
®
saliva alcohol test are all manufactured in our Bethlehem, Pennsylvania facilities. We
expect to continue to manufacture these products at this location for the foreseeable future.
17
We have contracted with a third party in Thailand for the assembly of the OraQuick
®
HIV device and the OraQuick
®
HIV Self-Test in order to supply certain international markets. This supply agreement had an initial term of
one year, and automatically renews for additional annual periods unless either party provides a timely notice of termination prior to the end of an annual period. We believe that other firms would be able to manufacture these OraQuick
®
tests on terms no less favorable than those set forth in the agreement if the Thailand contractor would be unable or unwilling to continue manufacturing this product.
We can purchase the HIV antigens, the nitrocellulose and certain other critical components used in the OraQuick
®
HIV product lines, the HCV antigens used in the OraQuick
®
HCV test and the antigen used in the Western blot HIV-1 confirmatory test only
from a limited number of sources. If for any reason these suppliers are unwilling or no longer able to supply our antigen or nitrocellulose needs, we believe that alternative supplies could be obtained at a competitive cost. However, a change in any
of the antigens, the nitrocellulose or other critical components used in our products would require FDA approval and some additional development work. This in turn could require significant time to complete, increase our costs and disrupt our
ability to manufacture and sell the affected products.
Our MICROPLATE and AUTO-LYTE assays require the production of highly specific and
sensitive antibodies corresponding to the antigen of interest. Substantially all our antibody requirements are provided by contract suppliers. We believe that we have adequate reserves of antibody supplies and that we have access to sufficient raw
materials for these products.
Our OraSure QuickFlu
®
test is manufactured and
supplied by a third party, Princeton BioMeditech. There is no other supply source for this product.
The fully-automated high-throughput
oral fluid drug assays sold with our new Intercept i2
®
collection device are manufactured and supplied under a long-term agreement with Thermo Fisher. There is no other supply source for these
products.
The Histofreezer
®
product and our OTC cryosurgical products are
assembled by a U.S. vendor with certain components sourced from international suppliers. We believe that additional suppliers for our cryosurgical products are available on terms no less favorable than the terms of our existing supply agreements in
the event that our current suppliers would be unable or unwilling to continue supplying components and manufacturing finished products.
DNAG has two long-term contract manufacturing relationships to supply virtually all of its products, including the Oragene
®
product line. Many of the raw materials and components used in these products are also purchased from third parties, including one critical component that is purchased from a sole source
supplier. We believe there are other suppliers that can manufacture and supply the raw materials and components for the DNAG products.
Employees
As of December 31, 2016, we had 325 full-time employees (including 104 employees at our subsidiary, DNAG). Of this total,
there were 113 in sales, marketing and client services; 37 in research and development; 126 in operations, manufacturing, quality control, information systems, purchasing and shipping; 22 in quality assurance and regulatory affairs; and 27 in
administration and finance. This compares to 326 employees as of December 31, 2015. Our employees are not currently represented by a collective bargaining agreement.
Competition
The diagnostic
industry is a multi-billion dollar international industry and is intensely competitive. Many of our competitors are substantially larger than we are, and have greater financial, research, manufacturing and marketing resources than we do.
18
Important competitive factors for our products include price, quality, performance, ease of use,
customer service and reputation. Industry competition is based on these and the following additional factors:
|
|
|
Scientific and technological capability;
|
|
|
|
The ability to develop and market products and processes;
|
|
|
|
The ability to obtain FDA or other regulatory approvals;
|
|
|
|
The ability to manufacture products that meet applicable FDA requirements (i.e., good manufacturing
practices);
|
|
|
|
Commercial execution and strength of distribution;
|
|
|
|
Access to adequate capital;
|
|
|
|
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 a significant number of small companies produce only a few diagnostic products. As a result, the diagnostic test industry is highly fragmented and segmented.
The future market for diagnostic products is expected to be characterized by greater cost consciousness, the development of new technologies,
tighter reimbursement policies and consolidation. The purchasers of diagnostic products are expected to place increased emphasis on lowering costs, reducing inventory levels, obtaining better performing products, 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.
We expect competition to intensify as technological advances are made and become more widely known, and as new products reach the market.
Furthermore, new testing methodologies could be developed in the future that render our products impractical, uneconomical or obsolete. There can be no assurance that our competitors will not succeed in developing or marketing technologies and
products that are more effective than those we develop or that would render our technologies and products obsolete or otherwise commercially unattractive. In addition, there can be no assurance that our competitors will not succeed in obtaining
regulatory approval for these products, or introduce or commercialize them, before we can do so. These developments could have a material adverse effect on our business, financial condition and results of operations.
Several companies market or have announced plans to market oral specimen collection devices and tests both within and outside the United
States. We expect the number of devices competing with our OraQuick
®
, OraSure
®
,
Intercept
®
and Intercept i2
®
devices to increase as the benefits of oral fluid-based testing become more widely accepted.
Competition in the U.S. market for infectious disease testing in medical settings is intense and is expected to increase. Our principal
competition for HIV testing in the professional market comes from existing and new point-of-care rapid blood tests, automated laboratory-based blood tests, or other oral fluid-based tests. One of our competitors has received FDA approval and a CLIA
waiver for a rapid oral fluid HIV test and another sells a rapid HIV antigen/antibody test that is both FDA approved and CLIA waived. Our OraQuick
®
rapid HCV test competes against
laboratory-based blood tests in the U.S., as there currently are no other rapid HCV testing products approved by the FDA.
19
Our competitors in the domestic infectious disease testing market include medical diagnostic
companies and specialized biotechnology firms, as well as pharmaceutical companies with biotechnology divisions. Competing tests are often sold at a lower price than we charge for our products. This competition can result in lost sales and
degradation of the price (and therefore the applicable profit margins) we can charge for our HIV and HCV tests.
Outside the U.S., our
rapid HIV and HCV tests compete against other rapid and laboratory-based tests. Significant sales of these products in Europe have not materialized principally because of differences in European healthcare systems compared to U.S. systems. Unlike
the U.S., adoption of rapid point-of-care diagnostics is not widespread in Europe because laboratory testing is entrenched and healthcare systems are structured around centralized testing models. In addition, many competing tests in international
markets are sold at very low prices. We intend to continue to build awareness and develop strategies to expand sales of our OraQuick
®
HIV and HCV tests in European and other international
markets.
Our OraQuick
®
In-Home HIV oral fluid test is the only rapid HIV test
approved by the FDA for sale in the U.S. OTC market. We compete against one other non-rapid HIV blood test available in the OTC market, which requires consumers to self-collect a blood sample and then send it to a laboratory for testing. The
OraQuick
®
HIV Self-Test that we sell in certain international markets is expected to face competition from other blood-based rapid HIV self-tests.
Competition for our OraQuick
®
Ebola test includes government and
commercially-developed laboratory and point-of-care molecular tests, along with a small number of rapid antigen tests sold under FDA Emergency Use Authorization (EUA). Our Ebola test is the only product with regulatory authorization for use on both
whole blood samples from living patients and oral fluid samples from cadavers.
The OraSure QuickFlu
®
test competes primarily against other rapid flu tests sold by various third parties in the U.S. hospital and public health markets.
Our Oragene
®
collection system competes against other types of collection devices
used for molecular testing, such as blood collection devices and buccal swabs, which often are sold for prices lower than the prices charged for the Oragene
®
products. Although we believe the
Oragene
®
device offers a number of advantages over these other products, the availability of lower price competitive devices can result in lost sales and degradation in pricing and profit
margin. Our Oragene
®
product is also facing increasing competition from similarly designed collection systems which are beginning to enter the market.
OMNIgene
®
GUT is being sold in the emerging microbiome market and competes
with a variety of non-standard in-house solutions developed by various researchers, including simply freezing the sample after collection. The microbiome market is expected to require standardization in the methods used for collection and
stabilization in order to derive more accurate and repeatable results. To date, DNAG is one of the few vendors to offer a solution that fully meets these requirements.
The OMNIgene
®
SPUTUM and
PrepIT
®
MAX products are unique and have no direct competition in terms of a comparable product. The primary competition for these products is the incumbent methodologies that are
widely adopted for collecting sputum samples and have been used in labs globally for many years.
In the substance abuse testing market,
our Intercept
®
drug testing system competes with laboratory-based drug testing products using sample matrices such as urine, hair, sweat and oral fluid. We expect competition for our products
to intensify, particularly from other domestic and international companies that have developed, or may develop, competing oral fluid drug testing products.
There are at least two competitors that sell fully-automated high-throughput oral fluid drug testing products in unregulated settings in the
United States. These competitors sell these assays for use with either their own oral fluid collector or a collector manufactured by another party. These offerings compete against our
Intercept
®
and Intercept i2
®
collection devices and related oral fluid assays.
20
Our MICRO-PLATE oral fluid drug assays, which are sold for use with the original Intercept
®
collector and our OraSure
®
collection device, also continue to come under increasing competitive pressure from home-brew
assays developed internally by our laboratory customers. Our oral fluid MICRO-PLATE assays also compete with urine-based homogeneous assays that are run on fully-automated, random access analyzers. These tests provide strong competitive pressure
because they provide the benefits of automation, including lower costs and short turn-around times.
Our MICRO-PLATE drugs-of-abuse
reagents sold in the forensic toxicology market 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. Our MICRO-PLATE tests meet the laboratories sensitivity needs, run
on automated equipment, are not radioimmunoassays, and are offered to the laboratory as a complete system solution of reagents, instrumentation and software to meet the specific needs of each customer. We compete with both homogeneous and
heterogeneous tests manufactured by many companies.
Sales of our AUTO-LYTE
®
urine assays have declined substantially during the past several years, primarily due to competition from home-brew assays developed internally by our laboratory customers, which can be produced at a cost lower than the price typically
paid for our products. Many of our customers no longer purchase our AUTO-LYTE
®
assays, and we may eventually stop selling this product line.
Q.E.D.
®
competes against other semi-quantitative saliva-based alcohol tests that have
received U.S. Department of Transportation approval as well as breath alcohol tests. 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 provide fewer benefits than our Q.E.D.
®
test.
Our professional cryosurgical product is sold primarily to physicians, including family practitioners, pediatricians and podiatrists. This
product primarily competes against other portable cryosurgical systems used for the removal of benign skin lesions in both the U.S. and Europe. In addition, certain of our distributors sell private label cryosurgical products that compete with our
Histofreezer
®
product. Our OTC cryosurgical products compete against other cryosurgical products offered in the U.S. OTC market and certain international OTC markets.
Patents and Proprietary Information
We seek patents and other intellectual property rights to protect and preserve our proprietary technology and our right to capitalize on the
results of our research and development activities. We also rely on trade secrets, know-how, continuing technological innovations and licensing opportunities to provide competitive advantages for our products in our markets and to accelerate new
product introductions. We regularly search for third-party patents in fields related to our business to shape our 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.
We have five United States patents and
numerous foreign patents for the OraSure
®
and Intercept
®
collection devices and technology relating to oral fluid collection,
containers for oral fluids, methods to test oral fluid, formulations for the manufacture of synthetic oral fluid, and methods to control the volume of oral fluid collected and dispersed. The patents expire from March 2018 to December 2026. We have
also applied for additional patents, in both the United States and certain foreign countries, on such products and technology.
We have
five United States patents for our OraQuick
®
platform, as well as corresponding related international patents. We also have patent applications pending internationally. Four of the U.S.
patents expire from March to July 2019 and the fifth in July 2028. We have obtained licenses to certain lateral flow patents and to certain
HIV-1
and
HIV-2
patents held
by other parties. We also have obtained a license to certain HCV patents which we use to manufacture and sell a rapid HCV test on the OraQuick
®
technology platform.
21
We hold, through our subsidiary, DNAG, seventeen United States patents and numerous foreign
patents issued for compositions, methods and apparatuses for the collection, stabilization, transportation and storage of nucleic acids (DNA and RNA) from oral fluid and other bodily fluids and tissues. These patents expire from July 2020 through
March 2031.
We have two United States patents and numerous foreign patents issued for apparatuses and methods for the topical removal of
skin lesions relating to our cryosurgical wart removal products, and we have pending patent applications related to these products in the United States and in certain foreign countries. These patents expire from September 2025 to August 2032.
We require our employees, consultants, outside collaborators and other advisors to execute confidentiality agreements upon the commencement of
employment or consulting relationships with us. These agreements provide that all confidential information developed by or made known to the individual during the course of the individuals relationship with us is to be kept confidential and
not disclosed to third parties except in specific circumstances. In the case of employees and certain consultants, the agreements also provide that all inventions conceived by the individual during his or her tenure with us or the performance by the
consultant of services for us will be our exclusive property.
We own rights to trademarks and service marks that we believe are necessary
to conduct our business as currently operated. In the United States, we own a number of trademarks, including the OraSure
®
, Intercept
®
,
Intercept i2
®
, OraQuick
®
, OraQuick
ADVANCE
®
, Histofreezer
®
, OraSure QuickFlu
®
, Q.E.D.
®
,
Oragene
®
, ORAcollect
®
, OMNIgene
®
, PrepIT
®
and AUTO-LYTE
®
trademarks. We also own many of these marks and others in several foreign countries. With respect to our international OTC
cryosurgical products, the Scholl and Dr. Scholl tradenames are owned by Reckitt Benckiser in Europe, Australia, New Zealand and other countries outside North and South America, and the POINTTS tradename is owned by Genomma.
Although important, the issuance of a patent or existence of trademark or trade secret protection does not in itself ensure the success of our
business. Competitors may be able to produce products competing with our patented products without infringing our 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 is not conclusive as to validity or as to the enforceable scope of the patent. The validity or enforceability of a patent or trademark can be challenged by litigation after its issuance or registration. If the
outcome of such litigation is adverse to the owner of the patent, the owners rights could be diminished or withdrawn. Trade secret protection does not prevent independent discovery and exploitation of the secret product or technique.
Government Regulation
General
Most of our products are regulated by the U.S. Food and Drug Administration, or the FDA, along with other federal, state and local agencies and
comparable regulatory bodies in other countries. This regulated environment governs almost all aspects of development, production and marketing, including product design and testing, authorizations to market, labeling, advertising and promotion,
manufacturing, distribution, post-market surveillance and reporting, and recordkeeping. We believe that our products and procedures are in material compliance with all applicable FDA regulations, but the regulations regarding the manufacture and
sale of our products may be unclear and are subject to change. We cannot predict the effect, if any, that these changes might have on our business, financial condition or results of operations.
All of our FDA-regulated products require some form of review and action by the FDA before they can be marketed in the United States. After
approval or clearance by the FDA, we must continue to comply with other FDA requirements applicable to marketed products and are subject to periodic inspections by the FDA and other regulatory bodies. Both before and after approval or clearance,
failure to comply with the FDAs requirements
22
can lead to significant penalties or could disrupt our ability to manufacture and sell these products. In addition, the FDA could refuse permission to obtain certificates needed to export our
products if the agency determines that we are not in compliance.
Domestic Regulation
Most of our products are regulated in the United States as medical devices.
There are several mechanisms by which regulated medical devices can be placed on the market in the United States. Some products may qualify for
clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act. To obtain this clearance from the FDA, the manufacturer must submit to the FDA a premarket notification that it intends to begin marketing the product, and show that the
product is substantially equivalent to another legally marketed predicate device t (i.e., a device that has been cleared through the 510(k) process; a device that was legally marketed prior to May 28, 1976; a device that has been downclassified
by the FDA; or a device that FDA has previously determined to be exempt from the 510(k) process). To be substantially equivalent, an applicant must show that when compared to a predicate, the new device has the same intended use and same technology,
or if different technology, that the new device is as safe and effective as the predicate and does not raise different questions of safety and effectiveness. In all cases, data from some form of performance testing is required and in some cases, the
submission must include data from human clinical studies. Marketing may only commence when the FDA issues a clearance letter finding that the new device is substantially equivalent to the predicate device. An applicant must submit a 510(k)
application at least 90 days before commercial distribution of the affected product commences. The standards and data requirements necessary for the clearance of a new device may be unclear or may be subject to change. Although FDA clearance usually
takes from four to twelve months, in some cases more than a year may be required before clearance is obtained, if at all.
If the medical
device does not qualify for the 510(k) procedure, either because it is not substantially equivalent to a legally marketed predicate device or because it is classified by the FDA as a high risk device, the FDA must approve either a request for
de
novo classification or a premarket approval application, or PMA, before marketing can begin. A
de novo
classification is an alternate pathway to classify novel devices of low to moderate risk for which no substantially equivalent
predicate device exists. Clearance of a
de novo
request generally takes six months to one year from the time of submission of the
de novo
request, although it can take longer. PMAs are generally required for devices that are determined
to be high risk and must demonstrate, among other matters, that the medical device provides a reasonable assurance of safety and effectiveness for the intended use(s) of the device. A PMA is typically a complex submission, supported by valid
scientific evidence, including the results of preclinical and clinical studies, detailed information about the manufacturing process for the device, and other data and information. Preparing a PMA is a resource-intensive and time-consuming process.
Once a PMA has been submitted, the FDA is required to review the submission within 180 days. However, the FDAs review may be, and often is, much longer, in many cases requiring one to three years or more, and may include requests for
additional data, review by an independent panel of experts, and facility inspections before approval is granted, if at all.
If the FDA
approves the PMA, it may place restrictions on the device. If the FDAs evaluation of the PMA or the manufacturing facility is not favorable, the FDA may deny approval of the PMA application or issue a not approvable letter. The FDA
may also require additional clinical trials, which can delay the PMA approval process by several years or prevent a PMA approval from being obtained.
If the FDA discovers that an applicant has submitted false or misleading information in any application or notification, the FDA may refuse to
review submissions until certain requirements are met pursuant to its Application Integrity Policy (AIP). Delays in receipt of or failure to receive such clearances or approvals, the loss of previously received clearances or approvals, or the
failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.
If there are any modifications made to our marketed devices, a new premarket notification or PMA supplement may be required to be submitted
to, and cleared or approved by, the FDA, before the modified device may be
23
marketed. A new PMA or a PMA supplement is required for modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the
devices intended use(s), manufacturing process, manufacturing facility, critical components, labeling and design. Likewise, a new 510(k) clearance is required for any modification that could significantly affect the safety or effectiveness of
the device, e.g. a significant change or modification in design, material, chemical composition, energy source, or manufacturing process or a major change or modification in the intended use(s) of the device.
A clinical trial may be required in support of a 510(k) submission and generally is required for a
de novo
or PMA application. These
trials generally require an Investigational Device Exemption, or IDE, application approved in advance by the FDA for a specified number of patients, unless the proposed study is deemed to be exempt from the IDE requirements. In addition, if a study
meets the requirements for a non-significant risk study, it may be eligible for compliance with abbreviated IDE requirements, which include a subset of the requirements applicable to significant risk medical device studies. If a full IDE
is required, an IDE application must be supported by appropriate data, such as laboratory testing results, protocols for the proposed investigation, and other information demonstrating that the device is appropriate for use with humans in a clinical
study. Clinical trials may begin if the IDE application is approved by the FDA and the appropriate institutional review boards, or IRBs, at the clinical trial sites. Submission of an IDE application does not give assurance that the FDA will issue
the IDE. If the IDE application is approved, there can be no assurance the FDA will determine that the data derived from the trial(s) support the ultimate approval or clearance of the device or warrant the continuation of clinical trials. An IDE
supplement must be submitted to and approved by the FDA before a sponsor or investigator may make a change to the investigational plan in such a way that may affect its scientific soundness, study indication or the rights, safety or welfare of human
subjects. The trial must also comply with the FDAs regulations, including the requirement that informed consent be obtained from each subject, and with clinical trial reporting regulations that require submission of information on certain
clinical trials to a database maintained by the National Institutes of Health. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to
obtain FDA clearance to market the product in the United States.
Some of our products are used for research only or other nonclinical or
non-diagnostic purposes. Our molecular collection products are sold to many academic and research institutions for research purposes and our drugs-of-abuse products are sold to laboratories and clinics for forensic or other non-medical uses. The FDA
does not currently regulate products used for these purposes, although other state and federal regulatory requirements may apply.
Another
option for marketing a product in the U.S. is through Emergency Use Authorization, or EUA, that is granted by the FDA as a result of the Secretary of Health and Human Services declaring an emergency justifying the authorization of emergency use of
certain in vitro diagnostic devices to aid in addressing the emergency. Typically, analytical and clinical studies are completed as required by the FDA. Products are exempt from design controls and other quality requirements in order to expedite
development of diagnostic tools to aid in the diagnosis of viral pathogens that have the potential to affect public health.
Most medical
devices distributed in the United States must comply with the FDAs Quality System Regulations (QSRs), including current good manufacturing practices. These regulations govern the entire lifecycle of a medical device, including
design, manufacture, testing, release, packaging, distribution, documentation and purchasing as well as complaint handling, corrective and preventative actions, and internal auditing. In complying with the QSRs, manufacturers must continue to expend
time, money and effort in the area of production, quality, and postmarket surveillance to ensure full compliance.
Companies are also
subject to other post-market and general requirements, including product listing and establishment regulations, which help facilitate FDA inspections and other regulatory action, post-market surveillance requests, restrictions imposed on marketed
products, promotional standards and requirements for recordkeeping and reporting of certain adverse reactions and malfunctions. Medical device reporting regulations
24
require that manufacturers report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or
serious injury if the malfunction of the device or a similar device were to recur.
The FDA regularly inspects companies to determine
compliance with the QSRs and other post-market requirements. Failure to comply with statutory requirements and the FDAs regulations can result in an FDA Form 483 (which is issued by the FDA at the conclusion of an inspection when an
investigator has observed any conditions that may constitute violations), public warning letters, monetary penalties against a company or its officers and employees, suspension or withdrawal of regulatory approvals, operating restrictions, total or
partial suspension of production, injunctions, product recalls, product detentions, refusal to provide export certificates, seizure of products and criminal prosecution. We believe that our facilities and procedures are in material compliance with
the FDAs OSR regulations and other postmarket requirements, but the regulations are subject to change or may be unclear, and we cannot be sure that FDA investigators will agree with our compliance with the FDAs postmarket requirements.
On December 23, 2013, our molecular collection systems subsidiary, DNAG, received a warning letter from the FDA. The warning letter
primarily focused on DNAGs response to two Form 483 observations issued by the FDA as a result of an inspection of DNAGs Ottawa, Canada facilities in September 2013.
Specifically, the warning letter indicated the need for additional documentation regarding design and development activities for DNAGs
products and focused in particular on the design planning and design history file for DNAGs 510(k)-cleared Oragene
®
DX collection device. In addition, the warning letter requested
additional documentation related to finished product acceptance testing activities for DNAGs ORAcollect
®
collection device. The letter further noted that DNAG does not currently have in
place an approved PMA or 510(k) clearance for its ORAcollect
®
device.
DNAG has
submitted a formal response to the FDA to address the issues referenced in the warning letter. In addition, DNAG received 510(k) clearance of its ORAcollect
®
device on April 18, 2016.
While the warning letter still remains pending, DNAG intends to continue to sell and market all of its products. We expect no material impact to product sales or our consolidated financial performance for the foreseeable future as a result of the
issues raised by the warning letter.
The Clinical Laboratory Improvement Amendments of 1988, or CLIA, prohibit any facility that conducts
laboratory testing on specimens derived from humans from providing information for the diagnosis, prevention or treatment of any disease or impairment of, or the assessment of, the health of human beings, unless there is in effect for such facility
a certificate issued by the U.S. Department of Health and Human Services applicable to the category of examination or procedure performed. Tests may be waived from this regulatory oversight if they meet certain requirements established under CLIA.
We consider the applicability of CLIA requirements in the design and development of our products. We have obtained a waiver of the CLIA requirements for our OraQuick
ADVANCE
®
rapid
HIV-1/2 antibody test, our OraQuick
®
HCV rapid antibody test and our Q.E.D.
®
alcohol saliva test and may seek similar waivers for
certain other products. In addition, the supplier of the OraSure Quick-Flu
®
test has obtained a CLIA waiver for that product. A CLIA waiver allows certain customers to use the waived products
that may not have been able to use them without complying with applicable quality control and other requirements.
Certain of our products
may also be affected by state regulations in the United States, which can restrict the use and sale of certain diagnostic products. We are presently working with legislators or regulators in certain of these states in an effort to modify or remove
any restrictions affecting our ability to sell products.
Advertising and Promotion
Advertising and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission
(FTC) and by other federal and state regulatory and enforcement authorities,
25
including the Department of Justice (DOJ), the Office of Inspector General of the Department of Health and Human Services, and various state attorneys general. Although physicians are
permitted to exercise medical judgment to use medical devices for indications other than those cleared or approved by the FDA, we may not promote our products for such off-label uses and can only market our products for cleared or
approved uses. Promotional activities for FDA-regulated products of other companies have also been the subject of enforcement actions brought under healthcare reimbursement laws and consumer protection statutes. In addition, under the federal Lanham
Act and similar state laws, competitors and others can initiate litigation relating to advertising claims. If the FDA determines that our promotional materials or training constitute promotion of an uncleared or unapproved use, it could request that
we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a notice of violation, a warning letter, injunction, seizure, civil fine or criminal penalties. FTC
enforcement actions often result in consent decrees that constrain future actions. DOJ prosecutions can result in significant criminal and civil penalties, including exclusion from the Medicare and Medicaid programs. If an enforcement action is
brought by the FDA or FTC, our reputation could be damaged and sales of our products could be impaired.
Import and Export Requirements
Products for export from the United States are subject to foreign countries import requirements and the exporting requirements of the
FDA, as applicable. In particular, international sales of medical devices manufactured in the United States that are not approved or cleared by the FDA for use in the United States, or are banned or deviate from lawful performance standards, are
subject to FDA export requirements.
Foreign countries often require, among other things, an FDA certificate for products for export, also
called a Certificate for Foreign Government (CFG). To obtain this certificate from the FDA, the device manufacturer must apply to the FDA. The FDA certifies that the product has been granted clearance or approval in the United States and
that the manufacturing facilities were in compliance with QSR regulations at the time of the last FDA inspection. If the FDA determines that our facilities or procedures do not comply with the QSR regulations, it may refuse to provide such
certificates until we resolve the issues to the FDAs satisfaction. Failure to obtain a CFG could inhibit our ability to export our products to countries that require such certificates.
International
We are also subject to
regulations in foreign countries governing products, human clinical trials and marketing, and may need to obtain approval from international public health agencies, such as the World Health Organization, in order to sell products in certain
countries. 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. We generally pursue approval only
in those countries that we believe 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 the 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 indicates that our quality system complies with standards applicable to activities ranging from initial product design and development through production and
distribution.
In the European Union (EU), products that fall under the scope of the Medical Devices Directive
(MDD) and the In Vitro Diagnostic Directive (IVDD) are not subject to the prior approval of a regulatory authority, but, depending on the class of product, may require prior review by a notified body. Notified bodies are
accredited and supervised by national regulatory authorities to conduct conformity assessment procedures of medical devices or other products. Such products must comply with certain essential requirements listed in those directives. ISO
certification creates a rebuttable presumption that the product satisfies the applicable requirements. Compliance with these requirements allows us to complete the applicable conformity assessment
26
procedure, involving a notified body where necessary, and to affix the CE mark to our products, without which they may not be placed on the market in the EU.
We have completed the applicable conformity assessment procedures and obtained the right to use the CE mark for the OraQuick
ADVANCE
®
HIV-1/2 test, the OraQuick
®
HCV test, our Histofreezer
®
product line, our OTC
cryosurgical removal product and certain of the Oragene
®
collection kits and OMNIgene
®
products sold by DNAG.
We must also comply with certain registration and licensing requirements as dictated by Health Canada, prior to commencing sales in Canada. We
have completed this process for several of our current products and may do so with respect to other products in the future. In addition, Canadian law requires manufacturers of medical devices to have a quality management system that meets various
ISO requirements in order to obtain a license to sell their devices in Canada.
Anti-Kickback and Other Fraud and Abuse Laws
The Federal Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation, or receipt of any form of remuneration in
return for, or to induce:
|
|
|
The referral of an individual to a person for the furnishing or arranging for the furnishing of items or
services reimbursable under Medicare, Medicaid or other governmental healthcare programs; or
|
|
|
|
The purchase, lease, or order of, or the arrangement or recommendation of the purchasing, leasing, or ordering
of any item or service reimbursable under Medicare, Medicaid, or other governmental healthcare programs.
|
Our products
are or may be purchased by customers that will seek or receive reimbursement under Medicare, Medicaid or other governmental healthcare programs. Noncompliance with the federal anti-kickback statute can result in exclusion from Medicare, Medicaid or
other governmental healthcare programs, and/or restrictions on our ability to operate in certain jurisdictions, as well as civil and criminal penalties, any of which could have an adverse effect on our business and results of operations.
The Federal Civil Monetary Penalties Law prohibits the offering or transferring of remuneration to a Medicare or Medicaid beneficiary that the
person knows or should know is likely to influence the beneficiarys selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services. Noncompliance can result in civil monetary penalties for each
wrongful act, assessment of three times the amount claimed for each item or service and exclusion from the Federal healthcare programs.
Many states have also adopted some form of anti-kickback laws. A determination of liability under such laws could result in fines and
penalties, restrictions on our ability to operate in these jurisdictions and significant damage to our reputation.
We are also subject to
other federal and state laws targeting fraud and abuse in the healthcare industry, including false claims laws, marketing conduct laws and laws constraining the sales, marketing and other promotional activities of manufacturers of medical devices by
limiting the kinds of financial arrangements, including sales programs, such manufacturers can enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices. Violations of these laws may be punishable by
criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. These laws and regulations are wide ranging and subject to changing
interpretation and application. In recent years, there has been greater scrutiny of marketing practices in the medical device industry which has resulted in several government investigations by various government authorities and the introduction
and/or passage of federal and state legislation regulating interactions between medical device manufacturers and healthcare professionals and providers and requiring the disclosure by medical
27
device manufacturers of payments to certain healthcare professionals and providers. For example, under the Sunshine Act provisions of the Affordable Care Act, device manufacturers are subject to
new federal reporting and disclosure requirements with regard to payments or other transfers of value made to physicians and teaching hospitals. Reports submitted under the Sunshine Act are placed in a public database. Device manufacturers are
required to submit annual reports by March 31 which cover the prior calendar year. To be in compliance with such disclosure laws, we have implemented necessary systems to accurately track gifts and other payments.
We have implemented a written Policy on Interactions with Health Care Professionals, which is based on the Code of Conduct for Interactions
with Health Care Professionals promulgated by the Advanced Medical Technology Association, or AdvaMed, a leading trade association representing medical device manufacturers. The Policy applies to all employees and is intended to comply with
applicable state and federal laws, regulations and government guidance. The Policy addresses interactions related to sales and marketing practices, research and development, product training and education, grants and charitable contributions,
support of third-party educational conferences, and consulting arrangements. While we believe that our practices are in compliance with the Anti-Kickback and other fraud and abuse laws, the standards for compliance with such statutes can be unclear
and subject to change.
Foreign Corrupt Practices Act and Other Anti-Corruption Laws
The U.S. Foreign Corrupt Practices Act (FCPA) prohibits corporations and individuals from engaging in certain activities to obtain
or retain business or to influence a person working in an official capacity. It is illegal to use any means of interstate commerce corruptly in the furtherance of any offer, payment, promise to pay or authorization of payment of anything of value to
any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. Our present and future business has and
will continue to be subject to the FCPA and various other laws, rules and/or regulations applicable to us as a result of our international sales. Those laws include the U.K. Bribery Act (the Bribery Act), which proscribes giving and
receiving bribes in the public and private sectors, bribing a foreign public official, and failing to have adequate procedures to prevent employees and other agents from giving bribes. U.S. companies that conduct business in the United Kingdom
generally will be subject to the Bribery Act. Penalties under the Bribery Act include potentially unlimited fines for companies and criminal sanctions for corporate officers under certain circumstances.
Environmental Regulation
Because of the
nature of our current and proposed research, development, and manufacturing processes, we are 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 solid wastes, hazardous materials and hazardous wastes. Products that we sell in Europe are subject to regulation in European Union, or EU, markets under the Restriction of the Use of Hazardous
Substances Directive, or RoHS. RoHS prohibits companies from selling products which contain certain hazardous materials, including lead, mercury, cadmium, chromium, polybrominated biphenyls and polybrominated diphenyl ethers, in EU member states. In
addition, the EUs Registration, Evaluation, Authorization, and Restriction of Chemicals Directive also restricts substances of very high concern in products.
Future environmental laws may require us to alter our manufacturing processes, thereby increasing our manufacturing costs. We believe that our
products and manufacturing processes at our facilities comply in all material respects with applicable environmental laws and worker health and safety laws; however, the risk of environmental liabilities cannot be completely eliminated.
The foregoing discussion of our business should be read in conjunction with the consolidated financial statements and accompanying notes
included in Item 15 of this Annual Report.
28
You should carefully consider the risks and uncertainties described
below, together with all of the other information included in this Annual Report and our other SEC filings, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing us. Additional risks and
uncertainties not disclosed or not presently known to us or that we currently deem immaterial also may impair our business operations. The occurrence of any of the following risks could harm our business, financial condition or results of
operations.
Regulatory Risks
The Need to Obtain Regulatory Approvals Could Increase Our Costs and Adversely Affect Our Financial Performance.
Many of our proposed and existing products are subject to regulation by the FDA and other governmental or public health agencies. In
particular, we are subject to strict governmental controls on the development, manufacture, labeling, distribution and marketing of our products.
The process of obtaining required approvals, clearances or premarket authorizations can involve lengthy and detailed laboratory testing, human
clinical trials, sampling activities and other costly, time-consuming procedures. These approvals, clearances and other premarket authorizations can require the submission of a large amount of clinical data which can be expensive and may require
significant time to obtain. It is also possible that a product will not perform at a level needed to generate the clinical data required to obtain such premarket authorizations. The submission of an application to the FDA or other regulatory
authority does not guarantee that an authorization to market or import the product will be received. A regulatory authority may impose requirements as a condition to granting an approval, clearance, or other premarket authorization that may include
significant restrictions or limitations. The regulatory authority may delay or refuse to grant premarket authorization, even though a product has been approved or registered without restrictions or limitations in another country or by another
agency. Delays in receipt or failure to receive such approvals, clearances or other premarket authorization could have a material adverse effect on our business, financial condition and results of operations.
All
in vitro
diagnostic products that are to be sold in the EU must bear the CE mark indicating conformance with the essential
requirements of the IVDD. We have obtained the CE mark for several of our existing products. We also intend to apply for CE marks for certain of our future products and are not aware of any material reason why we would be unable to obtain those
marks. However, there can be no assurance that compliance with all provisions of the IVDD will be demonstrated and the CE mark will be obtained or maintained for all products that we desire to sell in the EU. The failure to obtain or maintain the CE
mark for one or more of our products could lead to the termination of strategic alliances and agreements for sales of those products in the EU.
In addition, we or our distributors are often required to obtain premarket authorization with foreign governments or regulatory bodies before
we can import and sell our products in foreign countries. We may have difficulty obtaining such authorizations and, if obtained, such authorizations may contain restrictions that limit our ability to market and sell our products in the relevant
country. In addition, any change in our arrangement with a foreign distributor could result in the loss of or delay in transfer of any applicable product registrations, thereby interrupting our ability to sell those products in the affected markets.
Failure to Comply With FDA or Other Regulatory Requirements May Require Us to Suspend Production or Sale of Our Products or Institute
a Recall Which Could Result in Higher Costs and a Loss of Revenues.
Regulation by the FDA and other federal, state and foreign
regulatory agencies impacts many aspects of our operations, and the operations of our suppliers and distributors, including manufacturing, labeling, packaging,
29
adverse event reporting, recalls, distribution, storage, advertising, promotion and record keeping. We are subject to routine inspection by the FDA and other agencies to determine compliance with
QSR and FDA regulatory requirements in the United States and other applicable regulations worldwide, including but not limited to ISO standards. We believe that our facilities and procedures are in material compliance with the FDA requirements and
ISO standards, but the regulations may be unclear and are subject to change, and we cannot be sure that the FDA or other regulators will agree with our compliance with these requirements. The FDA and foreign regulatory agencies may require
post-marketing testing and surveillance to monitor the performance of approved or cleared products or impose conditions on any product clearances or approvals that could restrict the distribution or commercial applications of those products.
Regulatory agencies may impose restrictions on our or our distributors advertising and promotional activities or preclude these activities altogether if a noncompliance is believed to exist. In addition, the subsequent discovery of previously
unknown problems with a product may result in restrictions on the product or additional regulatory actions, including withdrawal of the product from the market.
Failure to comply with the applicable requirements of the FDA can result in, among other things, 483 notices, warning letters, administrative
or judicially imposed sanctions such as injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal to grant premarket clearance or PMA approval for devices, withdrawal of product registrations,
marketing clearances or approvals, or criminal prosecution. The ability of our suppliers to supply critical components or materials and of our distributors to sell our products could also be adversely affected if their operations are determined to
be out of compliance. Such actions by the FDA and other regulatory bodies could adversely affect our revenues, costs and results of operations.
Some of our products, particularly those sold by DNAG, are sold for research purposes in the U.S. We do not promote these products for
clinical diagnostic use and they are labeled For Research Use Only, or RUO. If the FDA were to disagree with our RUO designation of a product, we could be forced to stop selling the product until appropriate regulatory clearance or
approval has been obtained.
In the ordinary course of business, we must frequently make subjective judgments with respect to compliance
with applicable laws and regulations. If regulators subsequently disagree with the manner in which we have sought to comply with these regulations, we could be subjected to substantial civil and criminal penalties, as well as product recall, seizure
or injunction with respect to the sale of our products. The assessment of any civil and criminal penalties against us could severely impair our reputation within the industry and any limitation on our ability to manufacture and market our products
could have a material adverse effect on our business.
Our Ability to Respond to Changes in Regulatory Requirements Could Adversely
Affect Our Business.
We believe that our products and procedures are in material compliance with all applicable FDA regulations, and
ISO requirements, but the regulations regarding the manufacture and sale of our products and the QSR and ISO requirements may be unclear and are subject to change. In the EU, for example, legislators are in the process of adopting a new regulation
on in vitro diagnostic medical devices that would replace the IVDD and could impose additional regulatory requirements for our current or future products, such as increasing the involvement of notified bodies in the review process. Newly promulgated
regulations could require changes to our products, necessitate additional clinical trials or procedures, or make it impractical or impossible for us to market our products for certain uses, in certain markets, or at all. The FDA and other regulatory
authorities also have the ability to change the requirements for obtaining product approval and/or impose new or additional requirements as part of the approval process. These changes or new or additional requirements may occur after the completion
of substantial clinical work and other costly development activities. The implementation of such changes or new or additional requirements may result in additional clinical trials and substantial additional costs and could delay or make it more
difficult or complicated to obtain approvals and sell our products. In addition, the FDA may revoke an Emergency Use Authorization under which our products are sold, where it is determined that the underlying health emergency no longer exists or
warrants such authorization. We cannot predict the effect, if any, that these changes might have on our business, financial condition or results of operations.
30
Our Inability to Manufacture Products in Accordance With Applicable Specifications,
Performance Standards or Quality Requirements Could Adversely Affect Our Business.
The materials and processes used to manufacture
our products must meet detailed specifications, performance standards and quality requirements to ensure our products will perform in accordance with their label claims, our customers expectations and applicable regulatory requirements. As a
result, our products and the materials used in their manufacture or assembly undergo regular inspections and quality testing. Factors such as defective materials or processes, mechanical failures, human errors, environmental conditions, changes in
materials or production methods, and other events or conditions could cause our products or the materials used to produce or assemble our products to fail inspections and quality testing or otherwise not perform in accordance with our label claims
or the expectations of our customers.
Any failure or delay in our ability to meet the applicable specifications, performance standards,
quality requirements or customer expectations could adversely affect our ability to manufacture and sell our products or comply with regulatory requirements. These events could, in turn, adversely affect our revenues and results of operations.
We Are Subject to Numerous Government Regulations in Addition to FDA Requirements, Which Could Increase Our Costs and Affect Our
Operations.
In addition to the FDA and other regulations described previously, laws and regulations in some states may restrict our
ability to sell products in those states. While we intend to work with state legislators and regulators to remove or modify any applicable restrictions, there is no guarantee we will be successful in these efforts.
We must also comply with numerous laws relating to such matters as safe working conditions, manufacturing practices, environmental protection,
fire hazard control, disposal of hazardous substances and labor or employment practices. Compliance with these laws or any new or changed laws regulating our business could result in substantial costs. Because of the number and extent of the laws
and regulations affecting our industry, and the number of governmental agencies whose actions could affect our operations, it is impossible to reliably predict the full nature and impact of these requirements. To the extent the costs and procedures
associated with complying with these laws and requirements are substantial or it is determined that we do not comply, our business and results of operations could be adversely affected.
Failure To Comply With Privacy, Security and Breach Notification Regulations May Increase Our Costs.
The Company believes it is neither a covered entity nor a business associate of a covered entity and is not responsible for complying with the
Health Insurance Portability and Accountability Act of 1996, as amended (HIPAA). However, the Company has in place certain administrative, technical and physical safeguards to protect the privacy and security of consumers
personal information and endeavors to comply with all applicable state and federal laws with respect to the protection of consumers personal information. The Company is required to comply with varying state privacy, security and breach
reporting laws. If we do not comply with existing or new laws and regulations related to properly transferring data containing consumers personal information, we could be subject to monetary fines, civil penalties or criminal sanctions. In
addition to other federal and state laws that protect the privacy and security of consumers personal information, we may be subject to enforcement and interpretations by various governmental authorities and courts resulting in complex
compliance issues. For example, we could incur damages under state laws pursuant to an action brought by a private party for the wrongful use or disclosure of consumers personal information.
Compliance With Regulations Governing Public Company Corporate Governance and Reporting is Complex and Expensive.
Many laws and regulations impose obligations on public companies, which have increased the scope, complexity and cost of corporate governance,
reporting and disclosure practices. Examples include the Sarbanes-Oxley Act
31
of 2002, the requirements of The NASDAQ Global Market, The Dodd-Frank Wall Street Reform and Consumer Protection Act, the SECs requirements for public companies to provide financial
statements in interactive data format using the eXtensible Business Reporting Language (XBRL), and the International Financial Reporting Standards conversion requirements. Our implementation of certain aspects of these laws and
regulations has required and will continue to require substantial management time and oversight and may require us to incur significant additional accounting and legal costs. We continually evaluate and monitor developments with respect to new and
proposed rules and cannot predict or estimate the ultimate amount of additional costs we may incur or the timing of such costs. These laws and regulations are also subject to varying interpretations, in many cases due to their lack of specificity,
and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing
revisions to disclosure and governance practices. Although we are committed to maintaining high standards of corporate governance and public disclosure, if we fail to comply with any of these requirements, legal proceedings may be initiated against
us, which may adversely affect our business.
FDA Regulation of Laboratory-Developed Tests and Genetic Testing Could Affect Demand For
Our Products.
The FDA has regulatory responsibility over instruments, test kits, reagents and other devices used to perform
diagnostic testing by clinical laboratories. In the past, the FDA has taken the position that it has regulatory authority over laboratory-developed tests, or LDTs, but has exercised enforcement discretion in not regulating most LDTs performed by
high complexity CLIA-certified laboratories. LDTs are tests designed, developed, and performed in-house by a laboratory. Such laboratories are subject to regulation under CLIA but have not been subject to regulation by FDA under the agencys
medical device requirements. A significant portion of the total volume of genetic or molecular testing is performed with LDTs.
In
mid-2010, the FDA announced that it would begin regulating LDTs, including laboratory developed molecular tests, and in October 2014 issued proposed guidance on the regulation of LDTs for public comment. However, on November 18, 2016, the FDA
announced that it would not finalize the proposed guidance prior to the end of the Obama administration. On January 13, 2017, the FDA released a discussion paper synthesizing public comments on the 2014 draft guidance documents and outlining a
possible approach to regulation of LDTs. The discussion paper has no legal status and does not represent a final version of the LDT draft guidance documents. We cannot predict what policies the new administration will adopt with respect to
regulating LDTs.
Our subsidiary, DNAG, sells its DNA collection systems to certain laboratories and other customers for use with LDTs.
The FDAs increased regulation of LDTs could make it more difficult for laboratories and other customers to continue offering LDTs that involve genetic or molecular testing. This, in turn, could reduce demand for DNAGs products and
adversely impact our revenues.
Evolving Legislative, Judicial and Ethical Standards on the Use of Technology and Biotechnology Could
Affect Our Molecular Collection Systems Business.
The adoption of genetic testing is occurring within the broader context of a myriad
of decisions related to genetic patenting and genotyping. Issues associated with regulatory requirements, health insurance, data access and privacy, intellectual property protection, national and international legislative initiatives and other
variables impact the widespread adoption of genetic testing or specific segments or tests within the genetic testing market. These developments could impact sales of our molecular collection systems products.
Federal and State Laws Pertaining to Healthcare Fraud and Abuse Could Adversely Affect Our Business, Financial Condition and Results of
Operations.
We are subject to various federal and state laws targeting fraud and abuse in the healthcare industry, including
anti-kickback laws, false claims laws, laws constraining the sales, marketing and promotion of medical devices
32
by limiting the kinds of financial arrangements that manufacturers of these products may enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices and
laws requiring the reporting of certain transactions between manufacturers and healthcare professionals. Violations of these laws are punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from
participation in government healthcare programs such as Medicare and Medicaid. Many of the existing requirements are new and have not been definitively interpreted by state authorities or courts, and available guidance is limited. Unless and until
we are in full compliance with these laws, we could face enforcement action and fines and other penalties, and could receive adverse publicity, all of which could materially harm our business. In addition, changes in or evolving interpretations of
these laws, regulations, or administrative or judicial interpretations, may require us to change our business practices or subject our business practices to legal challenges, which could have a material adverse effect on our business, financial
condition and results of operations.
Our International Sales Create Potential Exposure Under Anti-Corruption Laws.
In 2016, approximately $28.4 million of our consolidated net revenues were generated from sales in a variety of foreign countries. These
international activities subject us to the U.S. Foreign Corrupt Practices Act (FCPA), the U.K. Bribery Act and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political
parties by business entities for the purpose of obtaining or retaining business. We have operations, agreements with third parties and make sales in countries known to experience corruption. Further international expansion may create increased
exposure to such practices. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees, consultants, sales agents or distributors that could be in violation of various laws, including the
FCPA, even though these parties are not always subject to our control. It is our policy to implement safeguards to discourage these practices by our employees and distributors, including employee training, contracts requiring compliance with the
FCPA and similar rules, and standard reviews of our distributors. However, our existing safeguards and any future improvements may not prove to be effective, and our employees, consultants, sales agents or distributors may engage in conduct for
which we might be held responsible. Violations of the FCPA and other laws may result in criminal or civil sanctions, which could be severe and we may be subject to other liabilities, which could negatively affect our reputation, business, results of
operations and financial condition.
Risks Relating to Our Industry, Business and Strategy
Our Ability to Sell Products Could be Adversely Affected by Competition From New and Existing Products.
The markets we serve are highly competitive and rapidly changing and we expect competition to intensify as technological advances are made and
become more widely known, and as new products reach the market. Many of our principal competitors have considerably greater financial, technical and marketing resources than we do. As new products enter the market, our products may become obsolete
or a competitors products may be more effective or more effectively marketed and sold than ours. In addition, there can be no assurance that our competitors will not succeed in obtaining regulatory approval for new products that would render
our technologies and products obsolete or otherwise commercially unattractive, or introduce or commercialize such products, before we can do so. If we fail to convince our customers of the advantages and economic value of our products or otherwise
maintain and enhance our competitive position, our customers may decide to use products developed by competitors which could result in a loss of revenues. These developments could have a material adverse effect on our business, financial condition
and results of operations.
We also face competition from products that are sold at a lower price. Where this occurs, customers may choose
to buy lower cost products from third parties or we may be forced to sell our products at a lower price, both of which could result in a loss of revenues or a lower gross margin contribution from the sale of our products. We may also be required to
increase our marketing efforts in order to compete effectively, which would increase our costs.
33
Consolidation in the Healthcare Industry Could Adversely Affect Our Future Revenues and
Operating Results.
The healthcare industry has experienced a significant amount of consolidation. As a result of this consolidation,
competition to provide goods and services to customers has increased. In addition, group purchasing organizations and integrated health delivery networks have served to concentrate purchasing decisions for some customers, which has also placed
pricing pressure on medical device suppliers. Further consolidation in the industry could exert additional pressure on the prices of our products.
Our Research, Development and Commercialization Efforts May Not Succeed and Our Competitors May Develop and Commercialize More Effective or
Successful Products.
In order to remain competitive, we must regularly commit substantial resources to research and development and
the commercialization of new or enhanced products. The research and development process generally takes a significant amount of time from product inception to commercial launch. This process is conducted in various stages. During each stage there is
a substantial risk that we will not achieve our goals on a timely basis, or at all, and we may have to abandon a new or enhanced product in which we have invested substantial time and money.
During 2016, 2015 and 2014, we incurred $9.8 million, $11.7 million and $12.1 million, respectively, in research and development expenses. We
expect to continue to incur significant costs related to our research and development activities.
Successful products require significant
development and investment, including testing to demonstrate their performance capabilities, cost-effectiveness or other benefits prior to commercialization. Regulatory approval must be obtained before most products may be sold and additional
development efforts on these products may be required before any regulatory authority will review them. As noted above, regulatory authorities may not approve these products for commercial sale or may substantially delay or condition approval. Even
if a product is developed and all applicable regulatory approvals are obtained, there may be little or no market for the product and entry into or development of new markets for our products may require an investment of substantial resources, such
as new employees, offices and manufacturing facilities. Moreover, we may spend a significant amount of money on advertising or other activities and fail to develop a market for the product. Other factors that could affect the success of our efforts
include our ability to manufacture products in a cost-effective manner, whether we can obtain necessary intellectual property rights and protection and our ability to obtain reimbursement authorizations in the markets where the product will be sold.
Accordingly, if we fail to develop and gain commercial acceptance for our products, or if competitors develop more effective products or
a greater number of successful new products, customers may decide not to purchase our products or may purchase and use products developed by our competitors. This would result in a loss of revenues and adversely affect our results of operations,
cash flow and business.
Failure to Successfully Commercialize Rapid Pointof-Care Ebola and Zika Tests Could Adversely Affect Our
Results of Operations and Business Prospects.
We have completed development of a rapid, Ebola antigen test using our OraQuick
®
technology platform. In 2015 and 2016, under an EUA (Emergency Use Authorization) received from the FDA, we sold $2.5 million of product to the CDC for field testing. Despite this initial
progress, there is no assurance that our Ebola test will perform at a level necessary to receive all of the regulatory approvals required for its use. In addition, it is possible that the FDA may revoke our EUA if it is determined that Ebola is no
longer an emergency warranting that authorization. Such action would negatively affect our ability to sell the product.
34
It is also uncertain whether, and to what degree, we will be successful in obtaining sustainable
purchase commitments for our Ebola test. Significant efforts are under way to develop a vaccine for the Ebola virus. If a vaccine is developed and widely deployed in the countries at risk for Ebola, the need for testing could be reduced as could the
demand for our product. Failure to successfully obtain the required regulatory approvals or receive sustainable and significant purchase commitments for our Ebola test could adversely affect our revenues and results of operations.
During 2016, we substantially completed development of a rapid Zika antibody test, also using our OraQuick
®
technology platform. Once development is complete and a prototype test is finalized, we intend to seek EUA approval for this product. There is no assurance that we will be able to obtain EUA or
other necessary regulatory approvals required to commercialize this product or, if such approvals are received, that we will obtain sustainable purchase commitments for our Zika test. Our failure to successfully complete development, obtain the
required regulatory approvals or receive substantial purchase commitments for our Zika test could adversely affect our revenues and results of operations.
Failure to Achieve Our Financial and Strategic Objectives Could Have a Material Adverse Impact on Our Business Prospects.
As a result of any number of risk factors identified in this Annual Report, no assurance can be given that we will be successful in
implementing our financial and strategic objectives, including our efforts to increase sales of our products or continue growing our molecular collection systems business. In addition, the funds for research, clinical development and other projects
have in the past come primarily from our business operations. If our business slows and we have less money available to fund research and development and clinical programs, we will have to decide at that time which programs to cut, and by how much.
Similarly, if adequate financial, personnel, equipment or other resources are not available, we may be required to delay or scale back our business. Our operations will be adversely affected if our total revenue and gross profits do not
correspondingly increase or if our technology, product, clinical and market development efforts are unsuccessful or delayed. Furthermore, our failure to successfully introduce new or enhanced products and develop new markets could have a material
adverse effect on our business and prospects.
If We Lose Our Key Personnel or Are Unable to Attract and Retain Qualified Personnel as
Necessary, Our Business Could be Harmed.
Our success depends to a large extent upon the contributions of our executive officers,
management and sales, marketing, operations and scientific staff. We may not be able to attract or retain a sufficient number of qualified employees in the future due to the intense competition for qualified personnel among medical products and
other life science businesses. Our ability to recruit such employees will depend on a number of factors, including compensation, benefits, work location, the prospects of our Company, and the possibility for advancement within our organization. We
generally do not enter into employment agreements requiring our employees to work for us for any specified period.
If we are not able to
attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will adversely affect our ability to effectively manufacture, sell and market our products, to meet the demands of our strategic
partners in a timely fashion, or to support research, development and clinical programs. Although we believe we will be successful in attracting and retaining qualified personnel, competition for experienced scientists and other qualified personnel
from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms.
35
Acquisitions or Investments May Not Generate the Expected Benefits and Could Disrupt Our
Ongoing Business, Distract Our Management, Increase Our Expenses and Adversely Affect Our Business.
We may pursue strategic
acquisitions or investments as a way to expand our business. These activities, and their impact on our business, are subject to many risks, including the following:
|
|
|
Suitable acquisitions or investments may not be found or consummated on terms or schedules that are
satisfactory to us or consistent with our objectives;
|
|
|
|
We may be unsuccessful in competing for acquisitions with other entities, some of which have greater financial
resources or may be better able to realize synergies with a potential target;
|
|
|
|
The benefits expected to be derived from an acquisition or investment may not materialize and could be
affected by numerous factors, such as regulatory developments, insurance reimbursement, our inexperience with new businesses or markets, general economic conditions and increased competition;
|
|
|
|
We may be unable to successfully integrate an acquired companys personnel, assets, management,
information technology systems, accounting policies and practices, products and/or technology into our business;
|
|
|
|
Worse than expected performance of an acquired business may result in the impairment of intangible assets;
|
|
|
|
Acquisitions may require substantial expense and management time and could disrupt our business;
|
|
|
|
We may not be able to accurately forecast the performance or ultimate impact of an acquired business;
|
|
|
|
An acquisition and subsequent integration activities may require greater capital and other resources than
originally anticipated at the time of acquisition;
|
|
|
|
An acquisition may result in the incurrence of unexpected expenses, stockholder lawsuits, the dilution of our
earnings or our existing stockholders percentage ownership, or potential losses from undiscovered liabilities not covered by an indemnification from the seller(s) of the acquired business;
|
|
|
|
An acquisition may result in the loss of our or the acquired companys key personnel, customers,
distributors or suppliers; and
|
|
|
|
An acquisition of a foreign business may involve additional risks, including, but not limited to, foreign
currency exposure, liability or restrictions under foreign laws or regulations, and our inability to successfully assimilate differences in foreign business practices or overcome language or cultural barriers.
|
The occurrence of one or more of the above or other factors may prevent us from achieving all or a significant part of the benefits expected
from an acquisition or investment. This may adversely affect our financial condition, results of operations and ability to grow our business or otherwise achieve our financial and strategic objectives.
Our Revenues Could be Affected by Third-Party Reimbursement Policies and Potential Cost Constraints.
The end-users of our products include hospitals, physicians and other healthcare providers. Use of our products could be adversely impacted if
end-users do not receive adequate reimbursement for the cost of our products from their patients healthcare insurers or payors. Our net sales could also be adversely affected by changes in reimbursement policies of governmental or private
healthcare payors, including in particular the level of reimbursement for our products.
In the United States, hospitals, physicians and
other healthcare providers who purchase diagnostic products generally rely on third-party payors, such as private health insurance plans, Medicare and Medicaid, to reimburse
36
all or part of the cost of the product and procedure. The overall escalating cost of medical products and services has led to, and will continue to lead to, increased pressures on the healthcare
industry, both foreign and domestic, to reduce the cost of products and services. Given the efforts to control and reduce healthcare costs in the United States in recent years, currently available levels of reimbursement may not continue to be
available in the future for our existing products or products under development. Third-party reimbursement and coverage may not be available or adequate in either the United States or international markets, current reimbursement amounts may be
decreased in the future and future legislation, and regulation or reimbursement policies of third-party payors, may reduce the demand for our products or our ability to sell our products on a profitable basis.
Changes in Healthcare Regulation Could Affect Our Revenues, Costs and Financial Condition.
In recent years, there have been numerous initiatives at the federal and state level for comprehensive reforms affecting the payment for, the
availability of and reimbursement for healthcare services in the United States. These initiatives have ranged from proposals to fundamentally change federal and state healthcare reimbursement programs, including providing comprehensive healthcare
coverage to the public under government-funded programs, to minor modifications to existing programs. One example is the Patient Protection and Affordable Care Act, the Federal healthcare reform law enacted in 2010 (the Affordable Care
Act). Similar reforms may occur internationally.
Legislative and regulatory bodies are likely to continue to pursue healthcare
reform initiatives and may continue to reduce funding in an effort to lower overall federal healthcare spending. The ultimate content and timing of any healthcare reform legislation and its resulting impact on us are impossible to predict. If
significant reforms are made to the healthcare system in the United States, or in other jurisdictions, those reforms may increase our costs or otherwise have an adverse effect on our financial condition and results of operations.
The Affordable Care Act imposes a 2.3% excise tax on certain transactions, including U.S. sales of many medical devices, which includes
domestic sales of certain of our products. This new tax became effective in January 2013. However, the Consolidated Appropriations Act of 2016, which was enacted late 2015, suspended the tax beginning January 1, 2016, with the suspension ending
December 31, 2017. It is unclear whether and to what extent this tax will impact our business if and when the suspension is lifted.
New or Changed Testing Guidelines Could Affect Sales of Our Diagnostic Products.
From time to time, governmental agencies such as the Centers for Disease Control and Prevention (CDC) issue diagnostic testing
guidelines or recommendations, which can affect the usage of our HIV and HCV testing products. For example, domestic professional OraQuick
®
HIV sales decreased 17% from 2014 to 2015, and 14%
from 2015 to 2016, in part due to customer migration to automated fourth generation HIV immunoassays performed in a laboratory, as recommended under testing guidelines issued by the CDC. In addition, some states have promulgated, or may in the
future promulgate, laws and regulations that affect HIV or HCV testing. The issuance of new laws or guidelines, or changes in existing laws or guidelines, and the manner in which these new or changed laws and guidelines are interpreted and applied
by healthcare practitioners, could impact the degree to which our OraQuick
®
rapid HIV and HCV testing products are used. New or changed laws or guidelines could affect the number of
people tested, the frequency of testing and whether testing products such as our OraQuick
®
HIV and HCV tests are used broadly for screening large populations or in a more limited
capacity as a confirmatory test or otherwise. These factors could in turn affect the level of sales of our products and our results of operations.
Reductions in Government Funding and Research Budgets Could Adversely Affect Our Business and Financial Results.
We sell our OraQuick
ADVANCE
®
HIV-1/2 and OraQuick
®
HCV tests into the public health market which consists of state, county and other governmental public health agencies, community based organizations, service
37
organizations and similar entities. We also sell these products into the hospital market. Many of these customers depend to a significant degree on grants or funding provided by governmental
agencies to run their operations including programs that use our products. In international markets, we often sell our products to or through foreign governmental agencies or parties funded by such agencies.
Many of our molecular collection products are sold to researchers at academic institutions, pharmaceutical and biotechnology companies,
government laboratories and private foundations. Many research customers are dependent for their funding on grants from U.S. governmental agencies such as the U.S. National Institutes of Health and agencies in other countries.
The level of available government grants or funding in the U.S. and elsewhere is unpredictable and may be affected by various factors
including economic conditions, legislative and regulatory developments, political changes, civil unrest and changing priorities for research and development activities. Any reduction or delay in government funding as a result of legislative or
regulatory changes or other factors, could cause our customers to delay, reduce or forego purchases of our products.
The New U.S.
Presidential Administration Could Have An Effect On Us.
On January 20, 2017, Donald J. Trump was inaugurated as the President of
the United States. President Trump has promised to repeal and replace the Affordable Care Act, has expressed concerns with respect to existing trade agreements such as the North American Free Trade Agreement, or NAFTA, and has indicated a desire to
make other regulatory changes and implement tax reform during his administration. Changes in regulatory or economic conditions or in the laws and policies governing foreign trade, taxes, manufacturing, and development in the United States could
impact our business. For example, changes in the level of reimbursement or the availability of funding for health care could create uncertainty for our business and negatively impact our revenues and results of operations. Similarly, over fifty
percent (50%) of DNAGs 2016 revenues represented sales of product into the United States. The imposition of tariffs or other changes in the trade relationship between Canada and the United States could negatively impact DNAGs
performance. Economic and regulatory changes could also affect foreign currency exchange rates which, in turn, could affect our reported financial results and our competitiveness on a worldwide basis.
Developments Related To The U.K.s Referendum On Membership in The E.U. Could Adversely Affect Us.
On June 23, 2016, the United Kingdom (U.K.) held a referendum and voted in favor of exiting the European Union, or E.U. This
Brexit referendum has created political and economic uncertainty, particularly in the U.K. and E.U. and this uncertainty may last for years. Until the precise terms and timing of the U.K.s exit from the E.U. are determined, it will
be difficult to predict the impact of the Brexit referendum. Our business in the U.K., the E.U. and world-wide could be affected during this period of uncertainty, and perhaps longer, by the impact of the Brexit referendum. The U.K.s decision
to exit the E.U. could cause volatility in global financial markets, including in global currency exchange rates, resulting in a slow-down in economic activity in the U.K., Europe or globally, negatively impact new trade agreements between the U.K
and other countries, including the United States, and result in significant regulatory changes and uncertainty. One or more of these events could make it more difficult or costly to sell our products, particularly in the U.K. and Europe, and
negatively affect our revenues and results of operations. The Brexit referendum may also influence other countries and result in additional countries deciding to leave the E.U. This in turn could result in additional changes and uncertainty, any or
all of which could negatively impact our business.
Increases in Demand for Our Products Could Require Us to Expend Considerable
Resources or Harm Our Customer Relationships if We are Unable to Meet That Demand.
If we experience significant or unexpected
increases in the demand for our products, we and our suppliers may not be able to meet that demand without expending additional capital resources. These capital resources could
38
involve the cost of new machinery or new manufacturing facilities. This would increase our capital costs, which could adversely affect our earnings. Our suppliers may be unable or unwilling to
expend the necessary capital resources or otherwise expand their capacity. In addition, new manufacturing equipment or facilities may require FDA approval before they can be used to manufacture our products. To the extent we are unable to obtain or
are delayed in obtaining such approvals, our ability to meet the demand for our products could be adversely affected.
If we or our
suppliers are unable to develop necessary manufacturing capabilities in a timely manner, our sales could be adversely affected. If we fail to increase production volumes in a cost effective manner or if we experience lower than anticipated yields or
production problems as a result of changes that we or our suppliers make in our manufacturing processes to meet increased demand, we could experience shipment delays or interruptions and increased manufacturing costs, which could also have a
material adverse effect on our revenues and profitability.
Unexpected increases in demand for our products may require us to obtain
additional raw materials in order to manufacture products to meet the demand. Some raw materials require significant ordering lead time and some are currently obtained from a sole supplier or a limited group of suppliers. We have long-term supply
agreements with certain of these suppliers, but these long-term agreements involve risks for us, such as our potential inability to obtain an adequate supply of raw materials and components and our reduced control over pricing, quality and timely
delivery. It is also possible that one or more of these suppliers may become unwilling or unable to deliver materials to us. Any shortfall in our supply of raw materials and components, or our inability to quickly and cost-effectively obtain
alternative sources for this supply, could have a material adverse effect on our ability to meet increased demand for our products. This could negatively affect our total revenues or cost of sales and related profits.
Our inability to meet customer demand for our products could also harm our customer relationships and impair our reputation within the
industry. This, in turn, could have a material adverse effect on our business and prospects.
We Rely on Information Technology in Our
Operations and Any Material Failure, Inadequacy, Interruption or Security Breach of that Technology Could Harm Our Ability to Efficiently Operate Our Business.
We rely heavily on enterprise resource planning and other complex information technology systems across our operations and on the internet,
including for management of inventory, purchase orders, invoices, shipping, interactions with our third-party logistics provider, revenue and expense accounting, online business, consumer call support, and various other processes and transactions.
Our ability to effectively manage our business, coordinate the production, distribution and sale of our products, respond to customer inquiries, and ensure the timely and accurate recording and disclosure of financial information depends
significantly on the reliability and capacity of these systems and the internet.
The failure of any of the foregoing systems to operate
effectively, problems with transitioning to upgraded or replacement systems, or disruptions in the operation of the internet, could cause delays in product sales and reduced efficiency of our operations. Significant expenditures could be required to
remediate any such problem.
Security Breaches and Other Disruptions Could Compromise Our Information, Expose Us To Liability and Harm
Our Reputation and Business
.
In the ordinary course of our business, we collect and store sensitive data, including intellectual
property, personal information, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our employees in our data centers and on our networks. Secure maintenance and
transmission of this information is critical to our operations business strategy. We generally rely on commercially available systems, software, tools and domestically available monitoring to provide security for processing, transmitting and storing
this sensitive date.
39
Computer hackers may attempt to penetrate our computer systems or our third party IT service
providers systems and, if successful, misappropriate personal or confidential information. In addition, a contractor or other third party with whom we do business may attempt to circumvent our security measures or obtain such information, and
may purposefully or inadvertently cause a breach involving sensitive information. While we will continue to evaluate and implement additional protective measures to reduce the risk and detect cyber incidents, cyberattacks are becoming more
sophisticated and frequent and the techniques used in such attacks change rapidly. Despite our cybersecurity measures (including employee and third party training, monitoring of networks and systems and maintenance of back up of protective systems)
which are continuously reviewed and upgraded, our information technology networks and infrastructure may still be vulnerable to damage, disruptions or shut downs due to attack by hackers or breaches, voyeur or malfeasance. Even the most well
protected IT networks, systems, and facilities remain potentially vulnerable because the techniques used in attempted security breaches are continually evolving and generally are not recognized until launched against a target or, in some cases, are
designed not to be detected and, in fact, may not be detected. Any such compromise of our or our third partys IT service providers data security and access, public disclosure, or loss of personal or confidential business information,
could result in legal claims proceedings, liability under laws to protect, privacy of personal information, and regulatory penalties, disrupt our operations, require significant management attention and resources to remedy any damages that result,
damage our reputation and customers willingness to transact business with us, any of which could adversely affect our business.
Risks
Relating to Collaborators
The Use of Sole Supply Sources or Third-Party Suppliers For Critical Components of Our Products Could
Adversely Affect Our Business.
We currently purchase certain critical components of our products from sole supply sources or other
third-party suppliers. For example, the biological antigens and antibodies, nitrocellulose and certain other components required to make our OraQuick HIV, HCV and Ebola products are currently purchased from sole source suppliers. Our OraSure
QuickFlu
®
test and the fully automated high-throughput drug assays sold with our Intercept i2
®
device are manufactured and supplied by
sole source suppliers and the conjugates used in our MICROPLATE oral fluid drugs-of-abuse assays are obtained from third party suppliers.
In addition, our subsidiary, DNAG, uses two third-party manufacturers to supply virtually all of its products, including its Oragene
®
line of collection kits. Many of the raw materials and components used in its products are also purchased from third parties, a critical one of which is obtained from a sole source supplier.
If our third-party suppliers are unable or unwilling to supply or manufacture a required component or product or if they make changes to a
component, product or manufacturing process or do not supply materials meeting our specifications, we may need to find another source and/or manufacturer. This could require that we perform additional development work and it may be difficult to find
such an alternate supply source in a reasonable time period or on commercially reasonable terms, if at all. We may also need to obtain FDA or other regulatory approvals for the use of an alternative component or for changes to our products or
manufacturing process. Completing that development and obtaining such approvals could require significant time and expense and such approvals may not occur at all. The availability of critical components and products from sole supply sources or
other third parties could also reduce our control over pricing, quality and timely delivery. These events could either disrupt our ability to manufacture and sell certain of our products into one or more markets or completely prevent us from doing
so, and could increase our costs. Any such event could have a material adverse effect on our results of operations, cash flow and business.
40
Our Failure to Maintain Existing Distribution Channels, or Develop New Distribution Channels,
May Result in Lower Revenues.
We have marketed many of our products by collaborating with laboratories, diagnostic companies and
distributors. Our sales depend to a substantial degree on our ability to sell products to these customers and on the marketing and distribution abilities of the companies with which we collaborate.
Relying on distributors or others to market and sell our products could harm our business for various reasons, including:
|
|
|
We may not be able to find suitable distributors to distribute our products on satisfactory terms, or at all;
|
|
|
|
Our distributors or other customers may not fulfill their contractual obligations to us or otherwise market
and distribute our products in the manner or at the levels we expect;
|
|
|
|
We do not control the incentives provided by our distributors to their sales personnel and the effectiveness
of these incentives could affect sales of our products;
|
|
|
|
Agreements with distributors may terminate prematurely due to disagreements or may result in litigation
between the parties;
|
|
|
|
We may not be able to renew existing distribution agreements on acceptable terms, or at all;
|
|
|
|
Our distributors may not devote sufficient resources or priority to the sale of our products;
|
|
|
|
Our distributors may prioritize their own private label products that compete with our products;
|
|
|
|
Our existing distributor relationships or contracts may preclude or limit us from entering into arrangements
with other distributors; and
|
|
|
|
We may not be able to negotiate future distribution agreements on acceptable terms, or at all.
|
Although we will try to maintain and expand our business with distributors and customers and require that they fulfill
their contractual obligations, there can be no assurance that such companies will do so or that new distribution channels will be available on satisfactory terms. As a result, our revenues and business could be adversely affected.
We May Need Strategic Partners to Assist in Developing and Commercializing Some of Our Products.
Although we may elect to pursue some product opportunities independently, opportunities that require a technology controlled by a third party,
a significant level of investment for development and commercialization or a distribution network beyond our existing sales force may necessitate involving one or more strategic partners. Our strategy for development and commercialization of
products may entail entering into arrangements with distributors or other corporate parties, universities, research laboratories, licensees and others. Relying on collaborative relationships could be risky to our business for a number of reasons,
including:
|
|
|
We may be required to transfer material rights to such strategic collaborators, licensees and others;
|
|
|
|
Our collaborators may not devote sufficient resources or attach a sufficiently high priority to the success of
our collaboration;
|
|
|
|
Our collaborators may not obtain regulatory approvals necessary to continue the collaborations in a timely
manner;
|
|
|
|
Our collaborators may be acquired by another company, decide to terminate our collaborative arrangement or
become insolvent;
|
|
|
|
Our collaborators may develop technologies or components competitive with our products;
|
41
|
|
|
Disagreements with collaborators could result in the termination of the relationship or litigation;
|
|
|
|
Collaborators may not have sufficient capital resources; and
|
|
|
|
We may not be able to negotiate future collaborative arrangements, or renewals of existing collaborative
agreements, on acceptable terms or at all.
|
While we generally expect that our collaborative partners will have an
economic motivation to succeed in performing their contractual responsibilities, there is no assurance that they will do so, either at the level required or at all, and the amount and timing of resources to be devoted to these activities will be
controlled by others. Reliance on strategic agreements can also make it difficult to accurately forecast our future revenues operating results. There can be no assurance that the expected revenues or profits will be fully derived from such
arrangements.
Actions of Third-Party Inventory Management and Logistics Providers Could Adversely Affect Our Ability to Supply
Products to Our Customers.
We use third-party logistics providers to store and manage our finished goods inventory and ship finished
product to our customers. We have selected highly reputable providers with extensive experience in the logistics field for these services. However, in the event any of our providers lose or damage our products, experience a casualty or catastrophic
event at a warehouse or otherwise fail to provide safe storage and timely handling and delivery of our products, we could incur additional costs, experience difficulty in supplying our products to our customers or suffer damage to our reputation in
the industry. These events could, in turn, reduce our revenues and adversely affect our results of operations.
Risks Relating to
Intellectual Property
Our Success Depends on Our Ability to Protect Our Proprietary Technology.
Our 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. Our success depends, in part, on our ability to develop and maintain a strong intellectual property portfolio or obtain licenses to patents and technologies, both in the United States and in
other countries. If we cannot continue to develop, obtain and protect intellectual property rights, our revenues and gross profits could be adversely affected. Moreover, our current and future licenses or other rights to patents and other
technologies may not be adequate for the operation of our business.
As appropriate, we intend to file patent applications and obtain
patent protection for our proprietary technology. These patent applications and patents will cover, as applicable, compositions of matter for our products, methods of making those products, methods of using those products and apparatuses relating to
the use or manufacture of those products. However, there have been changes to the patent laws and proposed changes to the rules of the U.S. Patent and Trademark Office, which may impact our ability to protect our technology and enforce our
intellectual property rights. For example, in 2011, the U.S. enacted sweeping changes to the U.S. patent system under the Leahy-Smith America Invents Act (the AIA), including changes that would transition the U.S. from a
first-to-invent system to a first-to-file system and alter the processes for challenging issued patents. These changes could increase the uncertainties and costs surrounding the prosecution of our patent applications and the
enforcement or defense of our issued patents.
We also rely on trade secrets, know-how and continuing technological advancements to
protect our proprietary technology. We have entered, and will continue to enter, into confidentiality agreements with our employees, consultants, advisors and collaborators. Our employees and third-party consultants also sign agreements requiring
that they assign to us interests in inventions and original expressions and any patents or copyrights arising from their work. However, these parties may not honor these agreements.
42
We cannot guarantee that the process of filing patents, the laws governing trade secrets and
proprietary information, or any agreements we enter into with employees, consultants, advisors or collaborators will provide adequate protection of our intellectual property rights. For example, employees, consultants and others who participate in
the development of our products may breach their agreements with us regarding our intellectual property, and we may not have adequate remedies for the breach. We also may not be able to effectively protect our intellectual property rights in some
foreign countries, as many countries do not offer the same level of legal protection for intellectual property as the United States. Furthermore, for a variety of reasons, we may decide not to file for patent, copyright or trademark protection
outside of the U.S. Our trade secrets could become known through other unforeseen means. Notwithstanding our efforts to protect our intellectual property, our competitors may independently develop similar or alternative technologies or products that
are equal or superior to our technology. Our competitors may also develop similar products without infringing on any of our intellectual property rights or design around our proprietary technologies.
Moreover, issued patents remain in effect for a fixed period and after expiration will not provide protection of the inventions they cover.
Once our patents expire, we may be faced with increased competition, which could reduce our revenues. We may also not be able to successfully protect our rights to unpatented trade secrets and know-how.
Some of our employees, including scientific and management personnel, were previously employed by competing companies. Although we encourage
and expect all of our employees to abide by any confidentiality agreement with a prior employer, competing companies may allege trade secret violations and similar claims against us.
We 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 our collaboration with them.
To facilitate development and commercialization of a
proprietary technology base, we may need to obtain licenses to patents or other proprietary rights from other parties. Obtaining and maintaining such licenses may require the payment of substantial amounts. In addition, if we are unable to obtain
these types of licenses, our product development and commercialization efforts may be delayed or precluded.
We May Become Involved in
Intellectual Property Disputes, Which Could Increase our Costs and Limit or Eliminate Our Ability to Sell Products or Use Certain Technologies.
From time to time, we may seek to enforce our patents or other intellectual property rights through litigation. In addition, there are a large
number of patents and patent applications in our product areas, and additional patents may be issued to third parties relating to our product areas. We, our customers or our suppliers may be sued for infringement of patents or misappropriation of
other intellectual property rights with respect to one or more of our products. Litigation in our industry regarding patent and other intellectual property rights is prevalent and is expected to continue. We may also have disputes with parties that
license patents to us if we believe the license is no longer needed for our products or the licensed patents are no longer valid or enforceable.
Our industry is characterized by a large number of patents, and the claims of these patents appear to overlap in many cases. As a result,
there is a significant amount of uncertainty regarding the extent of patent protection and infringement. Companies may have pending patent applications, which are typically confidential for the first eighteen months following filing, that cover
technologies we incorporate in our products. Accordingly, we may be subjected to substantial damages for past infringement or be required to modify our products or stop selling them if it is ultimately determined that our products infringe a third
partys proprietary rights. In addition, governmental agencies could commence investigations or criminal proceedings against our employees or us relating to claims of misuse or misappropriation of another partys proprietary rights.
43
Our involvement in litigation or other legal proceedings with respect to patents or other
intellectual property and proprietary technology, either as a plaintiff or defendant, could adversely affect our revenues, market share, results of operations and business because:
|
|
|
As is common with major litigation, it could consume a substantial portion of managerial and financial
resources;
|
|
|
|
Its outcome would be uncertain and a court may find that our patents are invalid or unenforceable in response
to claims by another party or that the third-party patent claims are valid and infringed by our products;
|
|
|
|
An adverse outcome could subject us to the loss of the protection of our patents or to liability in the form
of past royalty payments, penalties, reimbursement of litigation costs and legal fees, special and punitive damages, or future royalty payments, any of which could significantly affect our future earnings;
|
|
|
|
Failure to obtain a necessary license upon an adverse outcome could prevent us from selling our current
products or other products we may develop or acquire;
|
|
|
|
The pendency of any litigation may in and of itself cause our distributors and customers to reduce or
terminate purchases of our products; and
|
|
|
|
A court could award a preliminary and/or permanent injunction, which would prevent us from selling our current
or future products.
|
We may indemnify some customers and strategic partners under our agreements with such parties if
our products or activities have actually or allegedly infringed upon, misappropriated or misused another partys proprietary rights. Further, our products may contain technology provided to us by other parties, such as contractors, suppliers or
customers, and we may have little or no ability to determine in advance whether such technology infringes the intellectual property rights of a third party. These other parties may also not be required or financially able to indemnify us in the
event that an infringement or misappropriation claim is asserted against us.
We may also become involved in other types of disputes
regarding intellectual property rights, including state, federal or foreign court litigation, and 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 as well. Under the AIA, various forms of post issuance patent review proceedings have been authorized, including an inter-parties review process. These proceedings
permit certain persons to challenge the validity of a patent on the grounds that it was known from the prior art. The filing of such proceedings, or the issuance of an adverse decision in such proceedings, could result in the loss of valuable patent
rights that could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
The
Sales Potential for Our OraQuick
®
Products Could be Affected by Our Ability to Obtain Certain Licenses and by Future Litigation.
Our OraQuick
®
test platform is a lateral flow assay that tests for specific
antibodies or other substances. The term lateral flow generally refers to a test strip through which a sample flows and which provides a test result on a portion of the strip downstream from where the sample is applied. There are
numerous patents in the United States and other countries which claim lateral flow assay methods and devices. There are also patents that cover the type of antigen or antibody (i.e., HIV-1, HIV-2, HCV, Ebola, etc.) which our OraQuick
®
test is designed to detect. Some of these patents may broadly cover aspects of our OraQuick
®
test and are in force in the United States
and other countries. We may not be able to make or sell the OraQuick
®
test in the United States or other countries where these patents are in force.
We have obtained licenses under several lateral flow patents, and patents covering assays directed at specific analytes, which we believe are
sufficient to permit the manufacturing and sale of our OraQuick
®
products as
44
currently contemplated. However, licenses under additional patents may be required and it is possible that a third party could seek to enforce one or more patents against us.
If we are unable to successfully defend against or resolve patent infringement litigation or it is determined that a license is required and
it is not possible to negotiate or otherwise obtain a license agreement on reasonable terms under a necessary patent, our ability to manufacture and sell OraQuick
®
products and develop and
commercialize new applications using the same technology could be limited and we may incur increased costs or damages. In such case, we may be able to modify an OraQuick
®
product to avoid the
claim of infringement or the need for a license. However, this alternative could preclude or limit our ability to sell the OraQuick
®
product in the United States and other markets, which would
adversely affect our results of operations, cash flow and business.
Risks Relating to Products, Marketing and Sales
Our Future Success Depends Upon Market Acceptance of Our Existing and Future Products.
Our future success will depend, in part, on the market acceptance, and the timing of such acceptance, of new products such as our OraQuick
®
HCV test, OraQuick
®
In-Home HIV test, OraQuick
®
HIV Self-Test, OraQuick
®
Ebola test, OraQuick
®
Zika test, OMNIgene
®
GUT and OMNIgene
®
SPUTUM product offerings, and other new products or technologies that may be developed or acquired. To achieve market acceptance, we and/or our distributors will likely be required to
undertake substantial marketing efforts and spend significant funds to inform potential customers and the public of the existence and perceived benefits of these products. In addition, governmental funding for the purchase of our products may be
needed to help create market acceptance and expand the use of our products.
There may be limited evidence on which to evaluate the market
reaction to products that may be developed and our marketing efforts for new products may not be successful. It is also possible that governmental funding may be limited for new products, such as our OraQuick
®
HCV and Ebola tests or the new sample collection and stabilization products being commercialized by DNAG. As such, there can be no assurance that any products will obtain significant market
acceptance and fill the market need that is perceived to exist on a timely basis, or at all.
If Acceptance and Adoption of Oral Fluid
Testing and Collection Products Does Not Continue, Our Future Results May Suffer.
We have made significant progress in gaining
acceptance of oral fluid testing products, particularly for (i) HIV testing in the public health, hospital, insurance and other markets, and (ii) drugs-of-abuse testing in the workplace and criminal justice markets. Our subsidiary, DNAG,
has also made significant progress in gaining acceptance of oral fluid collection products that are used with molecular testing applications. However, the degree of acceptance for these products is uncertain, and one or more markets may resist the
adoption of oral fluid products as a replacement for other testing or collection methods in use today. As a result, there can be no assurance that we will be able to expand the use of our oral fluid testing products in these or other markets.
Our Customers May Resist Adoption of Rapid Point-of-Care Diagnostic Testing.
Sales of our rapid point-of-care diagnostic products, such as our OraQuick
ADVANCE
®
HIV-1/2, OraQuick
®
HCV and OraQuick
®
In-Home HIV tests, are an
important part of our business. Rapid point-of-care tests are beneficial because, among other things, they can be administered by healthcare providers in their own facilities or used by consumers at home without sending samples to central
laboratories and can help ensure that test results are delivered to the individuals being tested.
However, clinical reference
laboratories and hospital-based laboratories currently provide the majority of diagnostic tests used by physicians and other healthcare providers in the U.S. In certain international markets
45
such as Europe, diagnostic testing is performed primarily by centralized laboratories. Our future sales will depend, in part, on our ability to expand market acceptance of rapid point-of-care
testing by physicians, other healthcare providers and consumers and successfully compete against laboratory testing methods and products. We expect that clinical reference and other hospital-based laboratories will continue to compete vigorously
against our rapid point-of-care products. Even if we can demonstrate that our products are more cost effective, save time, or have better performance or other benefits, physicians, other healthcare providers and consumers may resist changing to
rapid point-of-care tests and instead may choose to obtain diagnostic results through laboratory tests. Our failure to achieve and expand market acceptance of our rapid point-of-care diagnostic tests with customers would have a negative effect on
our future sales growth.
We Expect to Face Intense Competition From Other Providers of Diagnostic Tests and Sample Collection
Products.
Our rapid point-of-care tests compete with similar point-of-care products made by our competitors. This competition is
particularly evident with respect to our OraQuick
ADVANCE
®
HIV-1/2 test. In addition, the Oragene
®
product line sold by our
subsidiary, DNAG, competes against other molecular collection products, such as blood collection kits and buccal swabs. There are a number of competitors making investments in competing technologies and products, and a number of our competitors may
have a competitive advantage because of their greater financial, technical, research and other resources. Some competitors offer broader product lines, aggressively discount prices for their products and may have greater name recognition than we
have. We also face competition from certain of our distributors or former customers that have created or may decide to create, their own products to compete with ours. If our competitors products take market share from our products through
more effective marketing or competitive pricing, our revenues, margins and operating results could be adversely affected. In addition, our revenues and operating results could be negatively impacted if some of our customers internally develop or
acquire their own sample collection devices and use those devices in place of our products in order to reduce costs.
Sales of Our
OraSure QuickFlu
®
Test May be Affected by Factors Beyond Our Control.
We
sell a rapid flu test under the tradename OraSure QuickFlu
®
, primarily in the U.S. hospital and public health markets. A number of factors that are beyond our control could affect sales of
this product, including:
|
|
|
Variability in the timing of the onset, length and severity of the flu season, which typically occurs from
November of one year to May of the following year;
|
|
|
|
Competition from other rapid flu tests in the markets we serve;
|
|
|
|
Deficiencies in the manufacture, design or performance of the product or failure by the manufacturer to meet
applicable quality and regulatory standards;
|
|
|
|
The inability of our supplier to provide sufficient quantities of the product;
|
|
|
|
Changes in the types or strains of influenza during a particular flu season; and
|
|
|
|
Lower than expected market penetration of the OraSure
QuickFlu
®
test.
|
Our Inability to Carry Out Certain of Our
Marketing and Sales Plans May Make it Difficult for Us to Grow or Maintain Our Business.
We have implemented in the past, and we
intend to implement in the future, an aggressive sales and marketing plan to expand sales of our products. Specifically, we will continue to expand the impact of our direct field sales force, use third-party distributors and manufacturers
sales representatives, and implement other sales and marketing programs. If we are unable to successfully implement these programs or modify these programs in response to evolving market and economic conditions, we may be unable to grow and our
business could suffer.
46
Our Sales Cycles Can be Lengthy, and May Depend on Public Funding, Which Can Cause Variability
and Unpredictability in Our Operating Results.
The sales cycles for certain of our products can be lengthy and unpredictable, which
makes it more difficult to accurately forecast revenues in a given period and may cause revenues and operating results to vary from period to period. Sales of our products often involve purchasing decisions by large public and private institutions,
may require many levels of approval and may be dependent on economic or political conditions and the availability of grants or funding from governmental or public health agencies which can vary from period to period in both amount and timing. For
example, in past years our OraQuick
ADVANCE
®
HIV-1/2 test has been purchased through bulk procurement or other funding provided by governmental agencies. Our OraQuick
®
HCV test has been purchased by customers who receive government funding, and we believe increased funding from the CDC and other agencies will be required to substantially increase the volume of
HCV testing, especially in the public health market. More recently, we have sold large quantities of our OraQuick
®
HCV test to foreign governments and agencies for use in broad-based or
country-wide HCV elimination programs. There can be no assurance that purchases or funding from these agencies will occur or continue, especially if current negative economic conditions continue or intensify. As a result, we may expend considerable
resources on unsuccessful sales efforts or we may not be able to complete transactions at all or on a schedule and in an amount consistent with our objectives.
We May Face Product Liability Claims for Injuries Resulting From the Use of Our Products.
We may be held liable if any of our products, or any product which is made with the use or incorporation of any of our technologies, causes
injury of any type or is found otherwise unsuitable during product testing, manufacturing, marketing, sale or usage. There is no assurance that we would be successful in defending any product liability lawsuits brought against us. Regardless of
merit or eventual outcome, product liability claims could result in:
|
|
|
Decreased demand for our products;
|
|
|
|
Damage to our image or reputation;
|
|
|
|
Costs related to litigation;
|
|
|
|
Increased product liability insurance costs;
|
|
|
|
Diversion of management time and attention; and
|
|
|
|
Incurrence of damages payable to plaintiffs.
|
We are selling cryosurgical products in the consumer or OTC market in the United States and certain countries and we may expand OTC sales of
these products into other countries. We also sell the OraQuick
®
In-Home HIV test in the United States OTC market, and we offer HIV self-tests to consumers internationally. We believe the sale
of products in the OTC market increases our potential exposure to product liability and other claims.
The Insurance We Purchase to
Cover Our Potential Business Risks May be Inadequate.
Although we believe that our present product liability and other insurance
coverage is sufficient to cover our current estimated exposures, we cannot be sure that we will not incur liabilities in excess of our policy limits. In addition, although we believe that we will be able to continue to obtain adequate coverage in
the future, there is no assurance that we will be able to do so at acceptable costs.
We Could Suffer Monetary Damages, Incur
Substantial Costs or be Prevented From Using Technologies Important to Our Products as a Result of Legal Proceedings.
We have been,
and in the future may become, involved in various legal proceedings arising out of our businesses. These may include commercial disputes, negligence claims or various other lawsuits arising in the ordinary
47
course of our business, including employment matters. Such lawsuits can seek damages, sometimes in substantial amounts, for commercial or personal injuries allegedly suffered and can include
claims for punitive or other special damages. An adverse ruling or rulings in one or more such lawsuits could, individually or in the aggregate, result in the termination or modification of a material contract or otherwise have a material adverse
effect on our sales, operations or financial performance.
Performance of Our Products May Affect Our Revenues, Stock Price and
Reputation.
Our products are generally sold with labeling that contains performance claims approved or cleared by the FDA or other
regulators. However, our products may not perform as expected. For example, a defect in one of our diagnostic products or a failure by a customer to follow proper testing procedures, may cause the product to report inaccurate information such as a
false positive result or a false negative result. A false positive or negative result can also occur even when there is no apparent product defect and the customer has apparently used our product properly. Identifying the root cause of a product
performance or quality issue can be difficult and time consuming.
If our products fail to perform in accordance with the applicable label
claims or otherwise in accordance with the expectations or needs of our customers, customers may switch to a competing product or otherwise stop using our products, and our revenues could be adversely affected. Under such circumstances, we may be
required to implement shipment holds or product recalls and incur warranty obligations, which would increase our costs. In addition, poor performance by one or more of our products and publicity surrounding such performance could have an adverse
effect on our reputation, our continuing ability to sell products and the prevailing market price of our Common Stock.
Our Ability To
Expand International Sales Could Adversely Affect Our Business and Results of Operations.
One of our strategic priorities is to
substantially expand our product sales internationally. An opportunity to accomplish this objective is with the sale of our OraQuick
®
HIV Self-Test in support of large self-testing programs in
certain African countries and elsewhere. In addition, we recently entered into a large product supply agreement with a foreign government, primarily in support of a country-wide HCV elimination program. We are also pursuing large supply arrangements
for similar programs in other countries. While we believe international sales of our HIV self-test and HCV product represent attractive long-term opportunities with significant growth potential, there is no guarantee that these opportunities will
continue or increase. Among other factors, competition from other cheaper products and the uncertainties of available funding could negatively impact the success of these opportunities. If international sales of these products do not continue or
increase or if we are otherwise unable to expand international sales of our other products, our revenues and results of operations could be negatively impacted.
In addition, market conditions in many countries often require that we sell our products at a price below our typical U.S. or European pricing
in order to participate in these markets. As a result, sales in certain countries may contribute lower profit margins to our business. To the extent these international sales comprise a large or increasing part of our business, our gross margins
will be negatively affected. In addition, we may have difficulty selling our products at a sufficiently low price to maintain or increase this business over the long term without funding support from public health entities, government agencies or
other sources. If we are unable to obtain this funding support at sufficient levels, or at all, our revenues and results of operations could be negatively affected.
Our International Presence May Increase Our Risks and Expose Our Business to Regulatory, Cultural or Other Restraints.
We seek to increase revenue derived from international sales of our products. Our international sales accounted for $28.4 million or 22% of
consolidated net revenues in 2016, $23.2 million or 19% of consolidated net
48
revenues in 2015, and $24.2 million or 23% of consolidated net revenues in 2014. In addition, our molecular collection systems business, which accounted for $32.2 million or 25% of consolidated
net revenues in 2016, is operated in Canada.
A number of factors could adversely affect the performance of our business and/or cause us
to incur substantially increased costs because of our international presence and sales, including those set forth below:
|
|
|
Uncertainty in the application of foreign laws and the interpretation of contracts with foreign parties;
|
|
|
|
The potential for inconsistent imposition of legal and regulatory requirements;
|
|
|
|
Cultural and political differences that favor local competitors or make it difficult to effectively market,
sell and gain acceptance of our products;
|
|
|
|
Inexperience in international markets and territories and difficulties in staffing and managing foreign
operations;
|
|
|
|
Exchange rates, currency fluctuations, tariffs and other barriers, extended payment terms and dependence on
international distributors or representatives;
|
|
|
|
Regulatory requirements (including compliance with applicable customs regulations) and the need for
reimbursement approvals;
|
|
|
|
Trade protection measures, trade sanctions and import/export licensing requirements;
|
|
|
|
The inability to obtain or maintain ISO certification for our or our suppliers manufacturing facilities;
|
|
|
|
Our inability to obtain or maintain regulatory approvals or registrations for our products;
|
|
|
|
Our inability to identify international distributors and negotiate acceptable terms for distribution
agreements;
|
|
|
|
Diversion to the U.S. of our products that are sold at lower prices into international markets;
|
|
|
|
The loss of one or more distributors and difficulties or delays in obtaining new or transferred product
registrations or approvals for use by a replacement distributor;
|
|
|
|
An increase of withholding and other taxes on remittances and other payments by a foreign subsidiary;
|
|
|
|
The creditworthiness of foreign distributors and customers and difficulty in collecting foreign accounts
receivable;
|
|
|
|
Difficulty of enforcing contractual obligations or recovering damages under foreign legal systems;
|
|
|
|
Difficulty collecting amounts owed by foreign governments or other customers;
|
|
|
|
Economic conditions, political instability, the absence of available funding sources, terrorism, civil unrest,
war and natural disasters in foreign countries;
|
|
|
|
Long sales cycles in international markets, especially for sales to foreign governments, quasi-governmental
agencies and international public health agencies;
|
|
|
|
The sale of competing products by foreign competitors at prices at or below the prices we offer for our
products;
|
|
|
|
Restrictions on our ability to repatriate investments and earnings from foreign operations;
|
|
|
|
Changes in shipping costs;
|
|
|
|
The unavailability of licenses to certain patents in force in a foreign country which cover our products; and
|
|
|
|
Reduced protection for, or enforcement of, our patents and other intellectual property rights in foreign
countries.
|
49
In addition, we have contracted with a third party in Thailand for the manufacture of a portion
of our OraQuick
®
HIV-1/2
tests, and all of DNAGs products are produced in Canada. We may enter into agreements to manufacture these or other
products in additional foreign countries as well. However, economic, cultural and political conditions and foreign regulatory requirements may slow or prevent the manufacture of our products in countries other than the United States. Interruption of
the supply of our products could reduce revenues or cause us to incur significant additional expenses in finding an alternative source of supply. Foreign currency fluctuations and economic conditions in foreign countries could also increase the
costs of manufacturing our products in foreign countries.
Our Increased Reliance on U.S. Government Contracts Adds Uncertainty and
Imposes Additional Requirements and Risks.
We are receiving funding from the U.S. government related to our OraQuick
®
Ebola rapid antigen test and our OraQuick
®
Zika rapid antibody test and we sell some of our products to the federal government.
Our reliance on U.S. government funding for certain of our products has increased. This adds uncertainty to our research and commercialization
efforts with respect to those programs and may impose requirements that increase the costs of commercialization and production of products developed under those government-funded programs. There can be no assurances that we can enter into new
contracts with the U.S. government related to our products. The process of obtaining U.S. government contracts is lengthy and uncertain. The U.S. governments determination to award any contracts or potentially exercise options under these
contracts may be challenged by an interested party, such as another bidder, at the relevant agency, at the U.S. Government Accountability Office (GAO) or in federal court. If such a challenge is successful, a contract award or option
exercise may be re-evaluated and terminated.
Our U.S. Government Contracts Require Compliance With Numerous Laws and Increases Our
Risk and Liability.
As a result of our U.S. government funding, we must comply with laws and regulations relating to the award,
administration and performance of U.S. government contracts. U.S. government contracts typically contain a number of extraordinary provisions that would not typically be found in commercial contracts and which may create a disadvantage and
additional risks to us as compared to competitors that do not rely on government contracts. As a U.S. government contractor, we are subject to increased risks of investigation, criminal prosecution and other legal actions and liabilities to which
purely private sector companies are not. The results of any such actions could adversely impact our business and have an adverse effect on our consolidated financial performance.
A violation of specific laws and regulations could result in the imposition of fines and penalties or the termination of our contracts, as
well as suspension or debarment. The suspension or debarment in any particular case may be limited to the facility, contract or subsidiary involved in the violation or could be applied to our entire enterprise in certain severe circumstances. Even a
narrow scope suspension or debarment could result in negative publicity that could adversely affect our ability to renew contracts and to secure new contracts, both with the U.S. government and private customers, which could materially and adversely
affect our business and results of operations. Fines and penalties could be imposed for failing to follow procurement integrity and bidding rules, employing improper billing practices or otherwise failing to follow rules relating to billing on
cost-plus contracts, receiving or paying kickbacks, or filing false claims, among other potential violations. In addition, we could suffer serious reputational harm and the value of our common stock could be negatively affected if allegations of
impropriety related to such contracts are made against us.
Our U.S. Government Contracts May Affect our Intellectual Property Rights.
Provisions in our U.S. government contracts may affect our intellectual property rights. Certain of our activities have been funded,
and may in the future be funded, by the U.S. government, including our contracts with
50
BARDA. When new technologies are developed with U.S. government funding, the government obtains certain rights in any resulting patents, including the right to a nonexclusive license authorizing
the government to use the invention. These rights may permit the government to disclose our confidential information to third parties and to exercise march-in rights to use and allow third parties to use our patented technology. The
government can exercise its march-in rights if it determines that action is necessary because we fail to achieve practical application of the U.S. government-funded technology, because action is necessary to alleviate health or safety needs, to meet
requirements of federal regulations, or to give preference to U.S. industry. In addition, government-funded inventions must be reported to the government, government funding must be disclosed in any resulting patent applications, and our rights in
such inventions may be subject to certain requirements to manufacture products in the United States.
Our U.S. Government Contracts Are
Subject to Future Orders, the Governments Choice to Exercise Options, and May be Terminated for the Governments Convenience.
In addition, our contracts with the U.S. government are subject to future funding and are subject to the right of the government to terminate
the contracts in whole or in part for its convenience. There is pressure for the U.S. government to reduce spending. The non-appropriation of funds or the termination for the governments convenience of our contracts could negatively affect our
financial results.
For U.S. government contracts that include options, such as our BARDA contracts, the U.S. government generally has the
unilateral right not to exercise such options and may not exercise an option if the agency is not satisfied with our performance under the contract or does not receive funding to continue the program, among other reasons. If levels of U.S.
government expenditures and authorizations for emerging diseases decrease or shift to programs in areas where we do not offer products or are not developing product candidates, or if the U.S. government otherwise declines to exercise its options
under its contracts with us, our business, revenue and operating results would suffer.
Our U.S. Government Contracts Are Subject To
Numerous Requirements in Order to be Reimbursed by the Federal Government.
Our current contracts with BARDA are cost plus fixed fee
contracts and potential future contracts with the U.S. government may also be structured this way. Under our cost plus fixed fee contracts, we are allowed to recover our approved costs plus a fixed fee. The total price on a cost plus fixed fee
contract is based primarily on allowable costs incurred, but generally is subject to contract funding limitations. U.S. government regulations require us to notify our customer of any cost overruns or underruns on a cost plus contract. If we incur
costs in excess of the funding limitation specified in the contract we may not be able to recover those cost overruns.
Our U.S.
Government Contracts and Related Administrative Processes Are Subject to Audits and Cost Adjustments by the Federal Government.
Federal government agencies can audit and investigate government contracts and the administrative processes and systems of government
contractors. These agencies can review our performance on government contracts, pricing practices, cost structure, and compliance with applicable laws, regulations and standards. They can also review our compliance with government regulations and
policies and the adequacy of our internal control systems and policies, including our purchasing, accounting, estimating, compensation and management information processes and systems. Any costs found to be improperly allocated to a specific
government contract, unallowable or unreasonable will not be reimbursed, and any such costs already reimbursed may be required to be refunded and certain penalties may be imposed. Adjustments arising from government audits and reviews could have a
material adverse effect on our business, financial condition, results of operations and prospects.
Moreover, if any administrative
process or system related to such contracts is found not to comply with governmental requirements, we may be subjected to government scrutiny that could delay or otherwise adversely
51
affect our ability to compete for or perform government contracts or collect our revenue in a timely manner. An unfavorable outcome of an audit of our government contracts could adversely affect
our results of operations.
Risks Relating to the Economy, Our Financial Results, Investments, Credit Facilities and Need for Financing
Economic Volatility and Disruption Could Adversely Affect Our Results of Operations, Cash Flow and Financial Condition or Those of
Our Customers and Suppliers.
Volatile economic conditions may occur again or continue in the future. These conditions could adversely
affect our financial performance and condition or those of our customers and suppliers. These circumstances could also adversely affect our access to liquidity needed to conduct or expand our business or conduct future acquisitions or make other
discretionary investments. 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 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. Even with the improvement of economic conditions, it
may take time for our customers and suppliers to establish new budgets and return to normal purchasing and shipping patterns. We cannot predict the reoccurrence of any economic slowdown or the strength or sustainability of an economic recovery.
We Have Experienced Losses in the Recent Past and May Not Be Able to Maintain Profitable Operations.
We experienced annual net losses during the five years prior to 2015. In addition, as of December 31, 2016, the Company had an
accumulated deficit of $150.4 million. Even though we achieved profitability in 2015 and 2016, there can be no assurance that we will be able to sustain this profitability in the future.
Our ability to continue profitable operations in the future will be dependent upon a number of factors including, without limitation, the
following:
|
|
|
Our ability to increase sales of our OraQuick
®
HCV
test and expand the use of this product internationally, particularly in HCV elimination programs implemented by foreign countries;
|
|
|
|
Our ability to mitigate declining sales of our OraQuick
ADVANCE
®
HIV-1/2 test in the United States and expand sales of our OraQuick
®
HIV Self-Test internationally;
|
|
|
|
Our ability to continue growing our molecular collection systems business;
|
|
|
|
The level of expenditures we are required to make in order to develop, obtain regulatory approvals for and
successfully commercialize our new products;
|
|
|
|
Our ability to successfully commercialize our
OraQuick
®
Ebola and Zika tests and other new products.
|
|
|
|
Our ability to improve manufacturing efficiencies;
|
|
|
|
Our ability to successfully launch new products after receipt of required regulatory approvals or the
acquisition of rights to those products;
|
|
|
|
The degree to which our major distributors comply with their contractual obligations, including minimum
purchase commitments;
|
|
|
|
Whether we are successful in obtaining and maintaining required regulatory approvals and registrations for our
new products;
|
|
|
|
The level of competition, including the degree to which competitors sell lower priced products or more
attractive offerings to compete with our products;
|
|
|
|
Changes in economic conditions in domestic or international markets, such as economic downturns, reduced
demand, inflation and currency fluctuations;
|
52
|
|
|
Failure to achieve our revenue growth targets;
|
|
|
|
Changes in distributor buying patterns or a buildup of significant quantities in our distributors
inventories or distribution channels; and
|
|
|
|
The costs and results of patent infringement, product liability and other litigation or claims asserted by or
against us.
|
We May Experience Fluctuations in Our Financial Results or Fail to Meet Our Financial Projections.
Our operating results can fluctuate from quarter to quarter and year to year, which could cause our growth or financial performance
to fall below the expectations of investors and securities analysts. Our financial projections for future periods are based on a number of assumptions, including estimated demand for our products. However, sales to our distributors and other
customers may fall short of expectations because of lower than estimated customer demand or other factors, including continued volatility and disruption in economic conditions, increasing competition, reduced governmental funding and other
circumstances described elsewhere in this Annual Report. Infrequent, unusual or unexpected changes in revenues or costs could also contribute to the variability of our financial results.
Customers in certain of the markets we serve often submit a high percentage of purchase orders in the third month of a calendar quarter.
Although this can vary from quarter to quarter, many customers make purchase decisions late in a quarter due to budgetary or financial requirements. In addition, certain governmental customers must fully spend budgeted funds by the end of their
fiscal year or risk losing these funds, which can contribute to fluctuations in our sales from year-to-year. This can make it difficult to accurately forecast whether we will achieve our quarterly sales forecasts and can cause variability in our
operating results.
In addition, our products provide different contributions to our gross margin. Accordingly, our operating results
could also fluctuate and be affected by the mix of products sold and the relative prices and gross margin contribution of those products. Failure to achieve operating results consistent with the expectations of investors and securities analysts
could adversely affect our reputation and the price of our Common Stock.
Our Estimates or Judgments Relating to Critical Accounting
Policies Are Based on Assumptions That Can Change or Prove to be Incorrect.
Our discussion and analysis of financial condition and
results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, we evaluate significant estimates used in preparing our financial
statements, including those related to:
|
|
|
Potential impairment of long-lived and intangible assets including goodwill;
|
|
|
|
Customer sales returns and allowances;
|
|
|
|
Allowance for uncollectible accounts receivable;
|
|
|
|
Reserve for inventory write-downs;
|
|
|
|
Stock-based compensation;
|
53
We base our estimates on historical experience and on various other assumptions that we believe
to be reasonable under the circumstances, as provided in our discussion and analysis of financial condition and results of operations, the results of which form the basis for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from these and other estimates if our assumptions change or if actual circumstances differ from those in our assumptions. If our operating results fall below the expectations of
securities analysts and investors, the price of our Common Stock may decline.
Changes in Foreign Currency Exchange Rates Could
Negatively Affect Our Operating Results.
Our financial statements are stated in U.S. Dollars and, historically, most of our
international sales have also been denominated in U.S. Dollars. As a result, in the past our exposure to foreign currency exchange rate risk has not been material. Nonetheless, these sales are subject to currency risks, since changes in the values
of foreign currencies relative to the value of the U.S. dollar can render our products comparatively more expensive. These exchange rate fluctuations could negatively impact international sales of our products, as could changes in the general
economic conditions in those markets.
In addition, the revenues and expenses of our subsidiary, DNAG, are recorded in Canadian Dollars
and certain of its international sales are denominated in local currencies, including the Euro, British Pound and Australian Dollar. Revenues and expenses denominated in foreign currencies are translated into U.S. dollars for purposes of reporting
our consolidated financial results. Our expectation is that the DNAG business will continue to grow and our exposure to foreign currency exchange rates may be more significant than in past years.
Exchange rate fluctuations may affect DNAGs revenues and expenses and the translation of DNAGs financial results into U.S.
dollars. Favorable movement in exchange rates have benefited us in prior periods. However, where there are unfavorable currency exchange rate fluctuations, our consolidated financial statements including our balance sheet, revenues and results of
operations, could be negatively affected. In addition, fluctuations in exchange rates could affect year-to-year comparability of operating results. In the past, we have not generally entered into hedging instruments to manage our currency exchange
rate risk, but we may need to do so in the future. However, our attempts to hedge against these risks may not be successful. If we are unable to successfully hedge against unfavorable foreign currency exchange rate movements, our consolidated
financial results may be adversely impacted.
Changes in Tax Laws or Their Application Could Adversely Affect Our Results of
Operations.
Changes in tax laws or their application could increase our costs and adversely affect our results of operations. Such
changes could affect applicable tax rates, utilization of tax loss carryforwards, and treatment of inter-company debt and interest payments.
Our Revolving Credit Facility Contains Certain Financial Covenants Which, if Not Satisfied, Could Limit Our Ability to Borrow in the Future
or Result in the Acceleration of the Amounts Borrowed Under This Facility.
Our revolving credit facility with a commercial bank
contains various financial and other covenants with which we must comply on an ongoing or periodic basis. If we enter into new or additional credit facilities or loan agreements, we would expect those arrangements would contain similar types of
covenants. Although we do not expect to violate these covenants and obligations, if such a violation were to occur, our ability to borrow funds in the future may be adversely affected. To the extent we borrow funds and a subsequent violation occurs,
the outstanding debt under our credit facility or other arrangement could become immediately due and payable and our lender(s) could proceed against any collateral securing such indebtedness.
54
We May Require Future Additional Capital.
Our future liquidity and ability to meet our future capital requirements will depend on numerous factors, including, but not limited to, the
following:
|
|
|
The costs, scope and timing of strategic acquisitions;
|
|
|
|
The costs and timing of expansion of sales and marketing activities;
|
|
|
|
The timing and success of the commercial launch of new products;
|
|
|
|
The extent to which we gain or expand market acceptance for existing, new or enhanced products;
|
|
|
|
The costs and timing of the expansion of our manufacturing capacity;
|
|
|
|
The success of our research and product development efforts;
|
|
|
|
The time, cost and degree of success of conducting clinical trials and obtaining regulatory approvals;
|
|
|
|
The magnitude of capital expenditures;
|
|
|
|
Changes in existing and potential relationships with distributors and other business partners;
|
|
|
|
The costs involved in obtaining and enforcing patents, proprietary rights and necessary licenses;
|
|
|
|
The costs and liability associated with patent infringement or other types of litigation; and
|
|
|
|
Competing technological and market developments;
|
If additional financing is needed, we may seek to raise funds through the sale of equity or other securities or through bank borrowings. There
can be no assurance that financing through the sale of securities, bank borrowings or otherwise will be available to us on satisfactory terms, or at all.
Terrorist Attacks or Natural Disasters May Adversely Affect Our Business.
Terrorist attacks or natural disasters, and subsequent governmental responses to these events, could cause economic instability. These actions
could adversely affect economic conditions both within and outside the United States and reduce demand for our products. These events could disrupt the operations of our customers and suppliers and eliminate, reduce or delay our customers
ability to purchase and use our products and our suppliers ability to provide raw materials and finished products.
Although we have
business interruption insurance, our facilities, including some pieces of manufacturing equipment and our computer systems, may be difficult to replace and could require substantial replacement lead-time. Various types of disasters, including
earthquakes, fires, floods and acts of terrorism, may affect our manufacturing facilities and computer systems. In the event our existing manufacturing facilities or computer systems are affected by man-made or natural disasters, we may have
difficulty operating our business and may be unable to manufacture products for sale or meet customer demands or sales projections. If our manufacturing operations were curtailed or shut down entirely, it would seriously harm our business.
Risks Relating to Our Common Stock
Our Stock Price Could Continue to be Volatile.
Our stock price has been volatile, has fluctuated substantially in the past, may be volatile in the future and could experience substantial
declines. The following factors, among others, could have a significant impact on the market for our Common Stock:
|
|
|
The performance of our business, including our efforts to increase sales of our OraQuick
®
HIV, HCV and molecular collection systems products and our OraQuick
®
In-Home HIV test and HIV Self-Test;
|
55
|
|
|
Future announcements concerning us and our products, including with respect to significant acquisitions,
strategic collaborations and joint ventures;
|
|
|
|
Clinical results with respect to our products or those of our competitors;
|
|
|
|
The status of clinical studies and pending submissions for required regulatory approvals;
|
|
|
|
The announcement of regulatory or enforcement actions by the FDA or other agencies against us, our products or
one or more of our customers;
|
|
|
|
The gain or loss of significant contracts and availability of funding for the purchase of our products;
|
|
|
|
Delays in the development, regulatory approval or commercialization of new or enhanced products;
|
|
|
|
Legislative developments and industry or competitive trends;
|
|
|
|
Regulatory, economic or other actions undertaken by the Trump Administration and resulting uncertainty related
to these actions.
|
|
|
|
Disputes or developments with key customers, distributors or suppliers;
|
|
|
|
Developments in patent or other proprietary rights;
|
|
|
|
Litigation or threatened litigation;
|
|
|
|
Complaints or concerns about the performance or safety of our products and publicity about those issues,
including publicity expressed through social media or otherwise over the internet;
|
|
|
|
Failure to achieve, or changes in, financial estimates by securities analysts and comments or opinions about
us by securities analysts or major stockholders;
|
|
|
|
Governmental regulation;
|
|
|
|
Changes in the level of competition;
|
|
|
|
Loss of or declines in sales to major distributors or customers or changes in the mix of products sold;
|
|
|
|
The relatively low trading volume for our Common Stock;
|
|
|
|
Period-to-period fluctuations in our operating results;
|
|
|
|
Additions or departures of key personnel;
|
|
|
|
General market and economic conditions; and
|
|
|
|
Terrorist attacks, civil unrest, war and national disasters.
|
|
|
|
Regulatory or economic actions undertaken by the Trump administration and related uncertainty regarding these
actions.
|
In addition, the stock market in general has experienced extreme price and volume fluctuations that have
affected the market price of our Common Stock, as well as the stock of many companies in the diagnostics and life sciences industries. Often, price fluctuations are unrelated to the operating performance of the specific companies whose stock is
affected.
In the past, following periods of volatility in the market price of a companys stock, securities class action litigation
has occurred against the issuing company. If we were subject to this type of litigation in the future, we could incur substantial costs and experience a subsequent diversion of our managements attention and resources, each of which could have
a material adverse effect on our revenue and earnings. Any adverse determination in this type of litigation could also subject us to significant liabilities.
56
Future Sales of Our Common Stock by Existing Stockholders, Executive Officers or Directors
Could Depress the Market Price of Our Common Stock and Make It More Difficult For Us to Sell Stock in the Future.
Sales of our Common
Stock in the public market, or the perception that such sales may occur, could negatively impact the market price of our Common Stock. We are unable to estimate the number of shares of our Common Stock that may actually be resold in the public
market since this will depend on the market price for our Common Stock, the individual circumstances of the sellers and other factors.
We
have a number of institutional stockholders that own significant blocks of our Common Stock. If one or more of these stockholders sell large portions of their holdings in a relatively short time, for liquidity or other reasons, the prevailing market
price of our Common Stock could be negatively affected. In addition, it is possible that one or more of our executive officers or non-employee members of our Board of Directors could sell shares of our Common Stock during an open trading window or
pursuant to a 10b5-1 sales plan under our Insider Trading Policy. These transactions and the perceived reasons for these transactions could have a negative effect on the prevailing market price of our Common Stock.
Investor Confidence and Share Value May be Adversely Impacted if We and/or Our Independent Registered Public Accounting Firm Conclude That
Our Internal Control Over Financial Reporting is Not Effective.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002,
the SEC adopted rules requiring us, as a public company, to include a report in our Annual Reports on Form 10-K that contains an assessment by management of the effectiveness of our internal control over financial reporting. In addition, our
independent registered public accounting firm must report on the effectiveness of these internal controls.
We expect that our internal
controls will continue to evolve as our business activities change. Although we seek to diligently and vigorously review our internal control over financial reporting in an effort to ensure compliance with the Section 404 requirements, any
control system, regardless of how well designed, operated and evaluated, can provide only reasonable, not absolute, assurance that its objectives will be met. In addition, the overall quality of our internal controls may be affected by the internal
control over financial reporting implemented by any business we acquire and our ability to assess and successfully integrate the internal controls of any such business.
If, during any year, our independent registered public accounting firm is not satisfied with our internal control over financial reporting or
the level at which our controls are documented, designed, operated, tested or assessed, or if the independent registered public accounting firm interprets the requirements, rules or regulations differently than we do, then it may issue a report that
is qualified. We also could conclude that our internal control over financial reporting is not effective. These events could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our
financial statements and effectiveness of our internal controls, which ultimately could negatively impact the market price of our Common Stock.
Because We Do Not Intend to Pay Cash Dividends on Our Common Stock, an Investor in Our Common Stock Will Benefit Only if Our Stock
Appreciates in Value.
We currently intend to retain our current earnings and future earnings, if any, to finance the expansion of our
business and do not expect to pay any cash dividends on our Common Stock in the foreseeable future. As a result, the success of an investment in our Common Stock will depend entirely upon any future appreciation. There is no guarantee that our
Common Stock will appreciate in value or even maintain the price at which investors purchased their shares.
57
Certain Provisions in Our Certificate of Incorporation and Bylaws and Under Delaware Law Could
Make a Third-Party Acquisition of Us Difficult.
Our Certificate of Incorporation and Bylaws contain provisions that could make it
more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. We are also subject to certain provisions of Delaware law that could delay, deter or prevent a change in control of us. These provisions could
limit the price investors might be willing to pay in the future for shares of our Common Stock.
Future Sales of Shares of Our Common
Stock Could Adversely Affect the Trading Price of Our Common Stock and Our Ability to Raise Funds in New Equity Offerings.
Future
sales of a substantial number of our shares of Common Stock or equity-related securities in the public market or privately, or the perception that such sales may occur, could adversely affect prevailing trading prices of our Common Stock, and could
impair our ability to raise capital through future offerings of equity or equity-related securities. No prediction can be made as to the effect, if any, that future sales of shares of Common Stock or the availability of shares of Common Stock for
future sale will have on the trading price of our Common Stock.