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 The leading web portal for pharmacy resources, news, education and careers April 28, 2017
Pharmacy Choice - Pharmaceutical News - ORASURE TECHNOLOGIES INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations. - April 28, 2017

Pharmacy News Article

 3/14/17 - ORASURE TECHNOLOGIES INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations.
Statements below regarding future events or performance are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Our actual results could be quite different from those expressed or
implied by the forward-looking statements. Factors that could affect results are
discussed more fully under the Item 1A, entitled "Risk Factors," and elsewhere
in this Annual Report. Although forward-looking statements help to provide
complete information about us, readers should keep in mind that forward-looking
statements may not be reliable. Readers are cautioned not to place undue
reliance on the forward-looking statements. We undertake no duty to update any
forward-looking statements made herein after the date of this Annual Report.

The following discussion should be read in conjunction with the consolidated financial statements contained herein and the notes thereto, along with the Section entitled "Critical Accounting Policies and Estimates," set forth below.

Overview


We develop, manufacture, market and sell 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. Our diagnostic products include tests
that are performed on a rapid basis at the point-of-care, tests that are
processed in a laboratory, and a rapid point-of-care HIV test approved for use
in the domestic consumer retail or over-the-counter ("OTC") market. We also
manufacture and sell devices 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. Lastly, we manufacture and sell medical
devices used for the removal of benign skin lesions by cryosurgery, or freezing.
Our products are sold in the United States and internationally to various
clinical laboratories, hospitals, clinics, community-based organizations, public
health organizations, research and academic institutions, distributors,
government agencies, physicians' offices, commercial and industrial entities,
retail pharmacies and mass merchandisers, and to consumers over the internet.

Current Consolidated Financial Results


For the year ended December 31, 2016, our consolidated net revenues were $128.2
million, an increase of 7% compared to $119.7 million for the year ended
December 31, 2015. Net product revenues for 2016 increased 2% to $106.9 million
when compared to 2015, primarily as a result of higher international sales of
our OraQuickHIV and HCV tests and higher sales of our molecular collection
systems and cryosurgical system products. These increases were partially offset
by lower domestic sales of our OraQuick HIV test and by lower sales of our
Ebola product. Consolidated other revenues for 2016 were $21.3 million, of which
$18.9 million represents the recognition of payments for exclusive co-promotion
rights and certain services provided under our HCV co-promotion agreement with
AbbVie, and $2.3 million represents revenue recognized in connection with
funding from the U.S. Department of Health and Human Services Office of the
Assistant Secretary for Preparedness and Response's Biomedical Advanced Research
and Development Authority ("BARDA") for our Ebola and Zika products. Total
exclusivity revenues in 2016 included an additional $5.4 million which was
accelerated and recognized due to the early termination of our agreement with
AbbVie as of December 31, 2016. Other revenues in 2015 of $15.3 million
represent $13.5 million of AbbVie exclusivity payments and $1.8 million of
funding received from BARDA for our Ebola product.

Our consolidated net income for the year ended December 31, 2016 was $19.7
million, or $0.35 per share on a fully-diluted basis, compared to consolidated
net income of $8.2 million, or $0.14 per share on a fully-diluted basis, for the
year ended December 31, 2015. Our consolidated net income for the current period
reflects the increase in product and other revenues, lower detailing costs
associated with the AbbVie HCV co-promotion agreement and reduced research and
development expenses as a result of a payment received to settle a claim against
one of our raw material suppliers. These improvements to the bottom line were
partially offset by higher legal fees, severance costs, consulting fees and
staffing-related expenses in 2016 as compared to 2015.



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Cash provided by operating activities for the year ended December 31, 2016 was
$22.8 million, compared to $15.8 million for the year ended December 31, 2015.
As of December 31, 2016, we had $120.9 million in cash, cash equivalents, and
short term investments, compared to $101.3 million at December 31, 2015.

Recent Developments

HCV Co-Promotion Agreement


On June 10, 2014, we entered into an agreement with AbbVie to co-promote our
OraQuick HCV test in the United States. Pursuant to the agreement, we granted
exclusive co-promotion rights for the OraQuick HCV test in certain markets to
AbbVie and we agreed to develop, implement, administer and maintain a patient
care database for the exclusive use of AbbVie. This patient care database was
used to compile patient information regarding new individuals who have tested
positive for HCV using our OraQuick HCV test. We also jointly agreed with
AbbVie to co-promote our OraQuick HCV test in certain market segments.

On June 30, 2016, we mutually agreed to an early termination of this agreement
with AbbVie effective December 31, 2016. Following the termination of the
agreement, AbbVie was relieved of its co-promotion obligations, including its
obligation to detail the OraQuick HCV test into physician offices, and has no
further financial obligations to us. We are no longer obligated to compensate
AbbVie for product detailing activities and are free to pursue arrangements with
other pharmaceutical companies to market and promote our OraQuick HCV test in
the U.S. As a result of the shortened term, the remaining associated deferred
revenue of $12.2 million at June 30, 2016, which represented a portion of the
exclusivity payments received from AbbVie, was recognized as other revenue over
the remaining six months of 2016 as we have no substantive on-going obligations
after December 31, 2016. During 2016 and 2015, $18.9 million and $13.5 million,
respectively, in exclusivity revenues were recognized and recorded as other
revenues in our consolidated statements of operations.

Rapid Zika Test


In August 2016, we were awarded a contract for up to $16.6 million in total
funding from BARDA related to our rapid Zika test. The six-year, multi-phased
contract includes 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 clinical and regulatory activities. Funding received under
this contract is recorded as other revenue in our consolidated statement of
operations as the activities are performed and the related costs are incurred.
During 2016, $616,000 was recognized in connection with funding under this
contract as other revenues in our consolidated statement of operations.

New Genomics Contract


In November 2016, Helix, a personal genomics company, selected our Oragene ? DX
device to provide self-collection of DNA samples to be used in a genetic
information discovery service offered by Helix for consumers. We will supply the
Oragene ? DX device and also provide kit fulfillment and logistic services for
Helix through our GenoFINDTM offering. Helix provides a secure and affordable
means for consumers to access data and information about their DNA, through
uniquely personalized applications created by Helix partners. The Oragene ? DX
collector will be used to collect saliva samples from consumers and those
samples will be sequenced in Helix's lab. Customers will then be able to access
DNA-powered insights in products and experiences created by Helix partners,
including well-known clinical and consumer brands, in the areas of health,
fitness, genealogy, family planning, lifestyle, and nutrition.

New HCV Foreign Supply Contract

In November 2016, we executed and began fulfilling a contract to supply a foreign government with $18.0 million of product, primarily to support a nationwide HCV testing and treatment program with the goal of

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eliminating HCV infection across the country. The contract calls for the
purchase of $16.0 million of our OraQuick HCV tests and $2.0 million of our
OraQuick HIV-1/2 tests. The contract provides for product deliveries over a
12-month period beginning in 2016 and continuing through late 2017. The contract
also includes an option for 2017/2018 under which the government may make an
additional purchase of up to 100% of the original quantities of product on the
same terms and conditions as provided in the contract. During 2016, we
recognized $1.9 million in product revenues related to this contract.

Litigation Settlement


Effective February 6, 2017, we settled our on-going litigation with Ancestry and
Spectrum. Under a Settlement and License Agreement executed by the parties,
Ancestry agreed to a settlement fee of $12.5 million which was paid to us in the
first quarter of 2017. In addition, we granted Ancestry a royalty-bearing,
non-exclusive, worldwide license to certain patents and patent applications
related to the collection of DNA in human saliva. The license granted to
Ancestry is limited to saliva DNA collection kits sold or used as part of
Ancestry's genetic testing service offerings and does not cover the sale or use
of collection kits outside of Ancestry's business. The Settlement and License
Agreement also provides us with a royalty-free, non-exclusive license to patents
related to Ancestry's existing saliva DNA collection kit and certain
modifications thereto.

Business Segments


We operate our business within two reportable segments: our "OSUR" business,
which consists of the development, manufacture and sale of diagnostic products,
specimen collection devices, and medical devices, and our "DNAG" or molecular
collection systems business, which consists primarily of the development,
manufacture and sale of oral fluid collection devices that are used to collect,
stabilize, transport, and store samples of genetic material for molecular
testing. OSUR revenues are derived primarily from products sold into the United
States and internationally to various clinical laboratories, hospitals, clinics,
community-based organizations, public health organizations, distributors,
government agencies, physicians' offices, commercial and industrial entities,
retail pharmacies, mass merchandisers and consumers over the internet. DNAG
revenues result primarily from products sold into the commercial market, which
consists of customers engaged in consumer genetics, clinical genetic testing,
pharmacogenomics, personalized medicine, microbiome and animal genetic testing,
as well as products sold into the academic research market which consists of
research laboratories, universities and hospitals.

Results of Operations

YEAR ENDED DECEMBER 31, 2016 COMPARED TO DECEMBER 31, 2015

                           CONSOLIDATED NET REVENUES

The table below shows a breakdown of total net revenues (dollars in thousands) generated by each of our business segments.



                                                Year Ended December 31,
                                                                      Percentage of Total
                                   Dollars                                Net Revenues
                                                          %
                             2016          2015        Change         2016             2015
    OSUR                   $  74,710     $  74,534           0 %           58 %           62 %
    DNAG                      32,214        29,924           8             25             25

    Net product revenues     106,924       104,458           2             83             87
    Other                     21,274        15,261          39             17             13

    Net revenues           $ 128,198     $ 119,719           7 %          100 %          100 %





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Consolidated net product revenues increased 2% to $106.9 million in 2016 from
$104.5 million in 2015, primarily as a result of higher international sales of
our OraQuick HIV and HCV tests and higher sales of our molecular collection
systems and cryosurgical system product. These increases were partially offset
by lower domestic sales of our OraQuick HIV test and lower sales of our Ebola
products. Other revenues in 2016 increased 39% to $21.3 million compared to
$15.3 million during 2015, largely due to higher exclusivity revenue recognized
under our HCV co-promotion agreement with AbbVie as a result of an additional
$5.4 million recognized in the current year due to the early termination of the
contract.

Consolidated net revenues derived from products sold to customers outside the
U.S. were $28.4 million and $23.2 million, or 22% and 19% of total consolidated
net revenues during the years ended December 31, 2016 and 2015, respectively.
Because the majority of our international sales are denominated in U.S. dollars,
the impact of fluctuating foreign currency exchange rates was not material to
our total consolidated net revenues.

Net Revenues by Segment

OSUR Segment

The table below shows the amount of total net revenues (dollars in thousands) generated by our OSUR segment.



                                                   Year Ended December 31,
                                                                         Percentage of Total
                                      Dollars                                Net Revenues
                                                            %
  Market                         2016         2015       Change          2016             2015
  Infectious disease testing   $ 48,408     $ 49,129          (1 )%           50 %           55 %
  Risk assessment testing        13,068       13,485          (3 )            14             15
  Cryosurgical systems           13,234       11,920          11              14             13

  Net product revenues           74,710       74,534           0              78             83
  Other                          21,274       15,261          39              22             17

  Net revenues                 $ 95,984     $ 89,795           7 %           100 %          100 %


Infectious Disease Testing Market


Sales to the infectious disease testing market decreased 1% to $48.4 million in
2016 from $49.1 million in 2015, primarily due to lower domestic sales of our
OraQuick HIV product , and lower sales of our OraQuick Ebola and In-Home HIV
tests, partially offset by higher international sales of our OraQuick HIV and
HCV tests.

The table below shows a breakdown of our total net OraQuick HIV and HCV product revenues (dollars in thousands) during 2016 and 2015.



                                             Year Ended December 31,
                                                                     %
              Market                     2016          2015        Change
              Domestic HIV             $  21,499     $ 24,956          (14 )%
              International HIV            5,248        2,410          118
              Domestic OTC HIV             6,320        6,992          (10 )

              Net HIV revenues            33,067       34,358           (4 )

              Domestic HCV                 7,436        7,502           (1 )
              International HCV            6,630        3,884           71

              Net HCV revenues            14,066       11,386           24

              Net OraQuick revenues   $  47,133     $ 45,744            3 %





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Domestic OraQuick HIV sales decreased 14% to $21.5 million for the year ended
December 31, 2016 from $24.9 million for the year ended December 31, 2015. This
decrease was primarily the result of the continued loss of sales to competing
fourth generation automated HIV immunoassays performed in a laboratory, as
recommended under testing guidelines issued by the Centers for Disease Control
and Prevention ("CDC"), the loss of sales to point-of-care HIV tests perceived
to be more sensitive, reduced program funding, and the timing of orders placed
by our customers. We anticipate that future domestic sales of our professional
HIV product will continue to be negatively affected as a result of the CDC's
testing guidelines, changes in government funding and continued product and
price competition. International sales of our OraQuick HIV test in 2016
increased 118% to $5.2 million from $2.4 million in 2015. This increase is
largely due to the shipment of product in support of a new HIV self-testing
program in Africa, new shipments into the Middle East, higher sales in Europe as
a result of the addition of a new distributor in Russia, and increased sales in
Asia due to a new military testing project.

Sales of our OraQuick In-Home HIV test decreased 10% to $6.3 million in 2016
from $7.0 million in 2015. This decline was primarily the result of a reduction
in promotions run in 2016 as compared to 2015 and a fourth quarter 2015 sales
increase immediately following a celebrity's announcement that he had tested
positive for the HIV virus, a comparable event did not occur in 2016. The
decline in sales was partially offset by the positive impact of a price increase
implemented in the third quarter of 2015.

Domestic OraQuick HCV sales decreased 1% to $7.4 million in 2016 from $7.5
million in 2015, largely due to the inclusion in 2015 of a $1.3 million order
for a U.S. government HCV testing program that did not recur in 2016, offset by
the expansion of existing HCV testing programs and the addition of new programs
in the public health market. International OraQuick HCV sales increased 71% to
$6.6 million in 2016 from $3.9 million in 2015, largely due the first shipments
of $1.4 million of product to a foreign government to support a nationwide HCV
testing and treatment program, the expansion of our business in Asia, and
increased sales in Africa.

We believe our OraQuick HCV product represents an opportunity for future sales
growth given the FDA approval of several new drug therapies for treating HCV.
However, demand for our HCV product, particularly in the U.S. public health
marketplace, may be somewhat tempered by the limited availability of government
funding allocated to HCV testing efforts and the time and effort required to
build awareness and demand for rapid HCV testing. Sales to physicians can also
be adversely affected by the level of reimbursement available from insurance
providers and competition from laboratory-based HCV tests. These and other
factors could limit the future growth of our HCV business.

International orders for both our HIV and HCV products can be sporadic in nature
and are often predicated upon the availability of governmental funding, the
impact of competition and other factors. As such, there is no assurance that
such sales will continue at the same levels in future periods.

Risk Assessment Market


Commencing in 2016, we have combined the former substance abuse testing market
and insurance risk assessment market categories under a single category referred
to as the "risk assessment market." We combined revenues for these markets
because they are similar in nature and testing modalities. Revenues for 2015
have been combined in a similar manner for presentation purposes.

Sales to the risk assessment market decreased 3% to $13.1 million for the year
ended December 31, 2016 from $13.5 million for the year ended December 31, 2015,
primarily as a result of lower sales of our OraSure oral fluid collection
device into the domestic life insurance market.

Cryosurgical Systems Market

Sales of our cryosurgical systems products (which includes both the physicians' office and OTC markets) increased 11% to $13.2 million in 2016 from $11.9 million in 2015.




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The table below shows a breakdown of our total net cryosurgical systems revenues (dollars in thousands) generated in each market during 2016 and 2015.



                                                   Year Ended December 31,
                                                                           %
         Market                                2016          2015        Change
         Domestic professional               $   5,545     $  4,311           29 %
         International professional                771          916          (16 )
         Domestic OTC                            1,350          390          246
         International OTC                       5,568        6,303          (12 )

         Net cryosurgical systems revenues   $  13,234     $ 11,920           11 %



Sales of our Histofreezer product to physicians' offices in the United States
increased 29% to $5.5 million in 2016 from $4.3 million in 2015, primarily due
to the recovery of business previously lost to competition from private label
brands, the initiation of a distributor expansion strategy, and the timing of
orders by certain customers. International sales of Histofreezer decreased 16%
to $771,000 in 2016 from $916,000 in the same period of the prior year,
primarily due to lower sales in Asia.

Sales of our domestic OTC wart removal products in the U.S. retail market increased to $1.4 million in 2016 from $390,000 in 2015, due to the launch of private-label products in two additional large pharmacy chains earlier this year.


Sales of our international OTC cryosurgical products during 2016 decreased 12%
to $5.6 million compared to $6.3 million in 2015, largely due to lower sales
into Europe partially offset by higher sales in Latin America.

Other revenues


Other revenues in 2016 increased 39% to $21.3 million from $15.3 million in
2015. AbbVie exclusivity revenues increased to $18.9 million in 2016 from $13.5
million in 2015 due to the early termination of our co-promotion agreement with
AbbVie which we agreed to as of June 30, 2016. The agreement terminated
December 31, 2016, and as a result of the shortened term, an additional $5.4
million of associated deferred revenue which existed as of June 30, 2016 was
recognized into revenue over the remaining six months of 2016. Following the
termination of our HCV co-promotion agreement with AbbVie on December 31, 2016,
AbbVie has no further financial obligations to us. Also included in other
revenues for 2016 was $2.3 million in BARDA funding, a 30% increase from the
$1.8 million in BARDA funding in 2015. This increase was due to new funding for
related to funding for our new Zika product. We expect BARDA-related revenue to
increase in 2017 as we will likely receive funding for both of our Ebola and
Zika products.

DNAG Segment

Molecular Collection Systems

Net molecular collection systems revenues increased 8% to $32.2 million in 2016
from $29.9 million in 2015. Sales of our Oragene product in the commercial
market increased 6% in 2016 compared to 2015, primarily as a result of sales to
new customers and ordering patterns of existing customers, partially offset by
the loss of two U.S. customers that previously filed for bankruptcy protection
in 2015. These customers contributed approximately $2.9 million in sales during
2015. The Company has no unreserved collection exposure related to these two
customers. Sales of our Oragene product in the academic market rose 6% in 2016
compared to 2015, due to the shipment of product to support a study on autism.
Sales in 2016 also included $1.1 million in sales of our gut microbiome product
compared to $539,000 in the same period of 2015. We believe interest in our
microbiome product offering continues to grow with both new and existing
customers.



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                         CONSOLIDATED OPERATING RESULTS

Consolidated gross margin was 69% for the year ended December 31, 2016 compared to 67% for the comparable period of 2015. Gross margin for 2016 increased primarily due to the higher AbbVie exclusivity revenues.


Consolidated operating income in 2016 was $20.3 million, a $12.2 million
increase from the $8.1 million of operating income reported in 2015. The current
period operating income benefited as compared to the prior year from higher
revenues, improved gross margins and lower sales and marketing and research and
development costs, partially offset by higher general and administrative
expenses in the current period.

                          OPERATING INCOME BY SEGMENT

OSUR Segment

OSUR's gross margin was 69% in 2016 compared to 66% in 2015. OSUR's margin was positively impacted by the increase in other revenues and lower scrap and spoilage costs during 2016.


Research and development expenses decreased 21% to $7.0 million in 2016 from
$8.9 million in 2015, largely as a result of a $1.4 million payment received to
settle a claim against one of our raw material suppliers. This settlement was
recorded as a reduction in research and development expense in 2016.

Sales and marketing expenses decreased 20% to $21.3 million in 2016 from $26.6
million in 2015, primarily as a result of lower detailing and other expenses
associated with our OraQuick HCV co-promotion agreement with AbbVie, as well as
lower staffing costs.

General and administrative expenses increased 12% to $22.6 million in 2015 from $20.1 million in 2015 due increased consulting, severance, and other staffing-related costs.

All of the above contributed to OSUR's operating income of $15.6 million for 2016, which included non-cash charges of $2.7 million for depreciation and amortization and $5.6 million for stock-based compensation.

DNAG Segment


DNAG's gross margin was 67% in 2016 compared to 70% in 2015. This decrease was
attributable to a higher volume of lower margin sales experienced in 2016 when
compared to 2015 coupled with the inclusion of severance costs in DNAG's costs
of goods sold in 2016.

Research and development expenses remained flat at $2.7 million in 2016 and 2015.

Sales and marketing expenses decreased 1% to $8.3 million in 2016 compared to $8.4 million in 2015 due to lower bad debt expense.

General and administrative expenses increased 7% to $5.7 million in 2016 compared to $5.3 million in 2015, largely due to higher legal costs.

All of the above contributed to DNAG's operating income of $4.6 million for 2016, which included non-cash charges of $3.0 million for depreciation and amortization and $467,000 for stock-based compensation.

                           CONSOLIDATED INCOME TAXES

We continue to believe the full valuation allowance established in 2008 against
our total U.S. deferred tax asset is appropriate as the facts and circumstances
necessitating the allowance have not changed. For the year ended December 31,
2016, state income tax expense of $250,000 was recorded compared to $0 in 2015.
Canadian income tax expense of $353,000 and $665,000 was recorded in 2016 and
2015, respectively.



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YEAR ENDED DECEMBER 31, 2015 COMPARED TO DECEMBER 31, 2014

                           CONSOLIDATED NET REVENUES

The table below shows a breakdown of total net revenues (dollars in thousands) generated by each of our business segments.



                                                Year Ended December 31,
                                                                       Percentage of Total
                                  Dollars                                  Net Revenues
                                                         %
                            2015          2014         Change          2015             2014
   OSUR                   $  74,534     $  75,116           (1 )%           62 %           71 %
   DNAG                      29,924        23,778           26              25             22

   Net product revenues     104,458        98,894            6              87             93
   Other                     15,261         7,570          102              13              7

   Net revenues           $ 119,719     $ 106,464           12 %           100 %          100 %



Consolidated net product revenues increased 6% to $104.5 million in 2015 from
$98.9 million in 2014, primarily as a result of higher sales of our molecular
collection systems, OraQuick HCV and Intercept products. These increases were
partially offset by lower sales of our OraQuick professional HIV and
cryosurgical systems products. Other revenues were $15.3 million in 2015, of
which $13.5 million represents exclusivity payments received under our HCV
co-promotion agreement with AbbVie and $1.8 million represents Ebola-related
funding from BARDA. Other revenues were $7.6 million in 2014, all which
represent exclusivity payments from AbbVie.

Consolidated net revenues derived from products sold to customers outside the
U.S. were $23.2 million and $24.2 million, or 19% and 23% of total consolidated
net revenues during the years ended December 31, 2015 and 2014, respectively.
Because the majority of our international sales are denominated in U.S. dollars,
the impact of fluctuating foreign currency exchange rates was not material to
our total consolidated net revenues.

Net Revenues by Segment

OSUR Segment

The table below shows the amount of total net revenues (dollars in thousands) generated by our OSUR segment.



                                                   Year Ended December 31,
                                                                         Percentage of Total
                                      Dollars                                Net Revenues
                                                            %
  Market                         2015         2014        Change         2015             2014
  Infectious disease testing   $ 49,129     $ 47,515            3 %           55 %           58 %
  Risk assessment testing        13,485       12,096           11             15             14
  Cryosurgical systems           11,920       15,505          (23 )           13             19

  Net product revenues           74,534       75,116           (1 )           83             91
  Other                          15,261        7,570          102             17              9

  Net revenues                 $ 89,795     $ 82,686            9 %          100 %          100 %


Infectious Disease Testing Market


Sales to the infectious disease testing market increased 3% to $49.1 million in
2015 from $47.5 million in 2014, primarily due to higher sales of our OraQuick
HCV and In-Home HIV tests, partially offset by lower sales of



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our OraQuick HIV professional product. In addition, 2015 net infectious disease
testing revenues included $2.3 million in initial sales of our OraQuick Ebola
rapid antigen test to the CDC for field testing in Africa. There were no Ebola
product sales in 2014.

The table below shows a breakdown of our total net OraQuick HIV and HCV product revenues (dollars in thousands) during 2015 and 2014.



                                             Year Ended December 31,
                                                                     %
              Market                     2015          2014        Change
              Domestic HIV             $  24,956     $ 29,933          (17 )%
              International HIV            2,410        2,483           (3 )
              Domestic OTC HIV             6,992        6,493            8

              Net HIV revenues            34,358       38,909          (12 )

              Domestic HCV                 7,502        4,220           78
              International HCV            3,884        3,048           27

              Net HCV revenues            11,386        7,268           57

              Net OraQuick revenues   $  45,744     $ 46,177           (1 )%



Domestic OraQuick HIV sales decreased 17% to $24.9 million in 2015 from $29.9
million in 2014. This decrease was primarily the result of the migration of some
customers to fourth generation automated HIV immunoassays performed in a
laboratory or at the point-of-care, as recommended under testing guidelines
issued by the CDC, or to competitive point-of-care HIV tests perceived to be
more sensitive. International sales of our OraQuick HIV test decreased 3%
during 2015 to $2.4 million from $2.5 million in 2014 primarily due to lower
sales in Africa and Europe partially offset by higher sales in Asia.

Sales of our OraQuick In-Home HIV test increased 8% to $7.0 million in 2015
from $6.5 million in 2014 largely due to a price increase implemented in August
2015 and an increase in sales volume in the fourth quarter of 2015 immediately
following a celebrity's announcement that he had tested positive for the HIV
virus. These increases in the latter half of 2015 were partially offset by a
decline in sales in the first quarter of the year which was primarily the result
of our decision to transition away from broad-based consumer advertising and
focus our marketing and promotional efforts at the retail outlet level in the
second half of 2014.

Domestic OraQuick HCV sales increased 78% to $7.5 million in 2015 from $4.2
million in 2014, primarily due to the addition of new HCV customers and higher
sales to current customers who have expanded their HCV testing programs.
International OraQuick HCV sales increased 27% to $3.9 million in 2015 from
$3.0 million in 2014, primarily due to the expansion of our business into Asia.

Risk Assessment Market


Commencing in 2016, we have combined the former substance abuse testing market
and insurance risk assessment market categories under a single category referred
to as the "risk assessment market." We combined revenues for these markets
because they are similar in nature and testing modalities. Revenues for 2015 and
2014 have been combined in a similar manner for presentation purposes.

Sales to the risk assessment market increased 11% to $13.5 million in 2015 from
$12.1 million in 2014, primarily as a result of higher sales of our Intercept
drug testing system partially offset by lower sales for our OraSure collection
device and assays to insurance customers. Domestic Intercept sales in 2015
increased to $7.8 million compared to $6.1 million in 2014 largely due to the
recovery of customers previously lost to competition, improved domestic
employment conditions, and the addition of customers who we believe recognize
the



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advantages of oral fluid testing in identifying recent drug use. Sales to
insurance customers decreased 12% to $3.2 million in 2015 from $3.7 million in
2014, as a result of reduced demand in the domestic life insurance market, as
well as the continued adoption by some underwriters of a "Simplified Issue"
policy. Where such a policy is issued, applicants are required to respond to a
questionnaire about their behaviors rather than undergoing lab-based tests.

Cryosurgical Systems Market

Sales of our cryosurgical systems products (which includes both the physicians' office and OTC markets) decreased 23% to $11.9 million in 2015 from $15.5 million in 2014.

The table below shows a breakdown of our total net cryosurgical systems revenues (dollars in thousands) generated in each market during 2015 and 2014.



                                                  Year Ended December 31,
                                                                          %
        Market                                2015          2014        Change
        Domestic professional               $   4,311     $  6,750          (36 )%
        International professional                916          693           32
        Domestic OTC                              390          108          261
        International OTC                       6,303        7,954          (21 )

        Net cryosurgical systems revenues   $  11,920     $ 15,505          (23 )%



Sales of our Histofreezer product in the domestic professional market decreased
36% to $4.3 million in 2015, compared to $6.8 million in 2014 largely as a
result of distributor consolidation and competition from new private-label
brands. During 2015, international sales of Histofreezer increased to $916,000,
compared to $693,000 in the prior year, primarily due to higher sales in Asia.

In the fourth quarter of 2014, we re-launched our OTC wart removal product in
the U.S. retail market through private labeling with a large pharmacy chain.
Sales related to this product were $390,000 for the full year of 2015 compared
to $108,000 in 2014.

Sales of our international OTC cryosurgical products during 2015 decreased 21%
to $6.3 million, compared to $8.0 million in 2014, largely due to lower sales to
our Latin American distributor. Sales to this distributor decreased to $1.3
million, compared to $3.0 million in 2014, due to challenges in the local
markets, including declining economic conditions in Argentina, a restructuring
of our distributor's business operations in Mexico, and overall customer
ordering patterns.

Other revenues


Other revenues were $15.3 million in 2015, of which $13.5 million represent the
recognition of exclusivity revenues under our HCV co-promotion agreement with
AbbVie, and $1.8 million represented Ebola-related funding from BARDA. Other
revenues in 2014 were $7.6 million and represented the recognition of
exclusivity revenues from AbbVie.

DNAG Segment

Molecular Collection Systems


Net molecular collection systems revenues, which consist primarily of sales of
our Oragene product line, increased 26% to $29.9 million in 2015 from $23.8
million in 2014. Sales of Oragene in the commercial market increased
approximately 41% in 2015, primarily due to increased orders from DNAG's largest
existing U.S.



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customer and incremental revenues from new customers, partially offset by lower
sales to other existing U.S. customers who experienced regulatory and
reimbursement challenges during 2015 and eventually filed for bankruptcy
protection. Sales in the academic market were flat at $9.8 million in both 2015
and 2014.

                         CONSOLIDATED OPERATING RESULTS

Consolidated gross margin was 67% in 2015 compared to 63% in 2014. This increase
was largely due to the $7.7 million increase in other revenues, a reduction in
royalty expense and a favorable change in the exchange rate between the Canadian
and U.S. dollar.

Consolidated operating income increased by $12.9 million to $8.1 million in
2015, compared to an operating loss of $4.8 million in 2014. The improved
operating performance reflects the increase in product and other revenues, the
impact of a favorable change in the Canadian to U.S. dollar exchange rate, and
lower advertising and promotional expenses associated with our OraQuick In-Home
HIV test. These improvements were partially offset by the absence of a $5.5
million payment received in 2014 due to the termination of our oral fluid assay
development agreement with Roche Diagnostics (which was reflected as a reduction
in operating expenses), as well as higher legal costs and increased expenses
under our HCV co-promotion agreement with AbbVie.

                          OPERATING INCOME BY SEGMENT

OSUR Segment


OSUR's gross margin was 66% in 2015 compared to 60% in 2014. OSUR's margin was
positively impacted by the increase in other revenues and a reduction in royalty
expense during 2015.

Research and development expenses decreased 5% to $8.9 million in 2015 from $9.4
million in 2014, largely due to lower lab supply costs, partially offset by
higher study and program costs related to the fully-automated high-throughput
drugs-of-abuse assays we are jointly developing with Thermo Fisher.

Sales and marketing expenses decreased 20% to $26.6 million in 2015 from $33.1
million in 2014, primarily as a result of lower advertising and promotional
costs for our OraQuick In-Home HIV test which totaled $1.8 million in 2015, as
compared to $8.5 million in 2014, partially offset by higher sales and marketing
costs associated with our OraQuick HCV co-promotion agreement with AbbVie.

General and administrative expenses decreased 2% to $20.1 million in 2015 from $20.6 million in 2014 due to lower staffing expenses.


In 2014, we received a $5.5 million payment due to the termination of our oral
fluid assay development agreement with Roche Diagnostics which was treated as a
reduction in operating expenses. This payment did not recur in 2015.

All of the above contributed to OSUR's operating income of $3.6 million for 2015, which included non-cash charges of $3.0 million for depreciation and amortization and $5.5 million for stock-based compensation.

DNAG Segment


DNAG's gross margin was 70% in 2015 compared to 73% in 2014. This decrease was
attributable to an increased volume of lower margin sales experienced in 2015
when compared to 2014, partially offset by a favorable change in the
U.S./Canadian dollar exchange rate of approximately $849,000 as compared to
approximately $430,000 in 2014.



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Research and development expenses increased 4% to $2.7 million in 2015 compared
to $2.6 million in 2014 due to increased spending on our gut microbiome product
and the new product initiatives, partially offset by a favorable change in the
U.S./Canadian dollar exchange rate of approximately $357,000 in 2015 as compared
to approximately $179,000 in 2014.

Sales and marketing expenses increased 6% to $8.4 million in 2015 from $8.0
million in 2014 due to higher commission and staffing costs, partially offset by
a favorable change in the U.S./Canadian dollar exchange rate of $1.1 million in
2015 as compared to approximately $508,000 in 2014.

General and administrative expenses increased 68% to $5.3 million in 2015 compared to $3.1 million in 2014, largely due to higher litigation costs partially offset by a favorable change in the U.S./Canadian dollar exchange rate of $464,000 as compared to approximately $218,000 in 2014.

All of the above contributed to DNAG's operating income of $4.5 million for 2015, which included non-cash charges of $2.7 million for depreciation and amortization and $566,000 for stock-based compensation.

                           CONSOLIDATED INCOME TAXES

We continue to believe the full valuation allowance established in 2008 against
our total U.S. deferred tax asset is appropriate as the facts and circumstances
necessitating the allowance have not changed. As a result, no U.S. income tax
expense was recorded for our pre-tax income in 2015 and no income tax benefit
was recorded for our pre-tax loss in 2014. For the year ended December 31, 2015
and 2014, we recorded Canadian income tax expense of $665,000 and $343,000,
respectively.

Liquidity and Capital Resources



                                                  December 31,
                                               2016          2015
                                                 (In thousands)
                 Cash and cash equivalents   $ 109,790     $  94,094
                 Short-term investments         11,160         7,225
                 Working capital               139,106       111,480

Our cash and short-term investment balances increased to $120.9 million at December 31, 2016 from $101.3 million at December 31, 2015. Our working capital increased to $139.1 million at December 31, 2016 from $111.5 million at December 31, 2015.


During 2016, we generated $22.8 million in cash from operating activities. Our
net income of $19.7 million included non-cash stock-based compensation expense
of $6.1 million and depreciation and amortization expense of $5.7 million,
partially offset by a net reduction of other non-cash charges of $482,000.
Additional sources of operating cash flow included an increase in accrued
expenses and other liabilities of $1.7 million largely as a result of accrued
severance costs and higher year-end accruals for management incentive bonuses
and a decrease in inventory balances of $1.5 million largely related to lower
raw material costs. Uses of operating cash flow during 2016 included a decrease
in deferred revenues of $8.3 million related to the recognition into revenue of
previously deferred exclusivity payments received from AbbVie, an increase in
our restricted cash balance of $1.8 million associated with the purchase of
certificates of deposit to collateralize standby letters of credit and an
increase in prepaid expenses and other assets of $652,000 resulting from the
recording of a $1.4 million receivable related to the settlement of a claim from
one of our raw material suppliers, partially offset by cash received for a
leasehold improvement receivable recorded at the end of 2015 associated with the
new Canadian office lease, and an increase in accounts receivable of $576,000
resulting from a higher level of product revenues recorded at the end of the
year.

We used a net amount of $8.1 million in investing activities in 2016 to purchase
$34.1 million of short-term investments and $4.4 million to acquire property and
equipment, partially offset by proceeds from the maturities



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of short-term investments of $30.4 million. During the year ending December 31,
2017, we expect to incur approximately $5.8 million in capital expenditures,
primarily to purchase additional manufacturing equipment, upgrade certain older
equipment and make improvements to our facilities.

Net cash used in financing activities was $1.2 million in 2016, which resulted
from the use of $2.7 million to repurchase shares under our previously
authorized stock repurchase plan, $784,000 to repurchase common stock to satisfy
withholding taxes related to the vesting of restricted shares, and $367,000 for
debt issue costs associated with our new credit facility, partially offset by
$2.7 million in proceeds received from the exercise of stock options.

On September 30, 2016, we entered into a credit agreement (the "Credit
Agreement") with a commercial bank, National Association. The Credit Agreement
provides for revolving extensions of credit in an initial aggregate amount of up
to $10,000 (inclusive of a letter of credit sub-facility of $2,500), with an
option to request, prior to the second anniversary of the closing date, that the
lender, at its election, provide up to $5,000 of additional revolving
commitments. Obligations under the Credit Agreement are secured by a first
priority security interest in certain eligible accounts receivable, 65% of the
equity of our subsidiary, DNAG, and certain related assets. There were no
borrowings under the facility from September 30, 2016 through December 31, 2016.

Borrowings under the Credit Agreement are subject to compliance with borrowing
base limitations tied to eligibility of accounts receivable. Interest under the
Credit Agreement is payable at the London Interbank Offered Rate for one, two,
three or six-month loans, as selected by the Company, plus 2.50% per year. The
Credit Agreement is subject to an unused line fee of 0.375% per year on the
unused portion of the commitment under the Credit Agreement during the revolving
period. The maturity date of the Credit Agreement is September 30, 2019.

In connection with the Credit Agreement, under certain circumstances, we must
comply with a minimum fixed charge coverage ratio of 1.10 to 1.00, measured as
of the last day of each fiscal month and for the twelve-fiscal month period
ending on such date. As of December 31, 2016, we were in compliance with all
applicable covenants in the Credit Agreement.

Our current cash balance and available borrowing under our revolving credit
facility are expected to be sufficient to fund our current operating and capital
needs for the foreseeable future. Our cash requirements, however, may vary
materially from those now planned due to many factors, including, but not
limited to, the scope and timing of future strategic acquisitions, the progress
of our research and development programs, the scope and results of clinical
testing, the cost of any future litigation, the magnitude of capital
expenditures, changes in existing and potential relationships with business
partners, the timing and cost of obtaining regulatory approvals, the timing and
cost of future stock repurchases, the costs involved in obtaining and enforcing
patents, proprietary rights and any necessary licenses, the cost and timing of
expansion of sales and marketing activities, market acceptance of new products,
competing technological and market developments, the impact of the current
economic environment and other factors.

Contractual Obligations and Commercial Commitments

The following sets forth our approximate aggregate obligations as of December 31, 2016 (in thousands) for future payments under contracts and other contingent commitments, for the year 2017 and beyond:



                                                           Payments due by December 31,
Contractual Obligations                 Total         2017        2018        2019       2020      2021       Thereafter
Operating leases1                      $  2,001     $    339     $   334     $   317     $ 341     $ 335     $        335
Employment contracts2                     3,367        1,775       1,275         317        -         -                -
Purchase obligations3                    11,272        7,418       3,088         383       383        -                -

Minimum commitments under contracts4 792 500 292

       -         -         -                -

Total contractual obligations5 $ 17,432 $ 10,032 $ 4,989

 $ 1,017     $ 724     $ 335     $        335





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1 Represents payments required under our operating leases. See Note 12 of the

Notes to the consolidated financial statements included herein.

2 Represents salary payments payable under the terms of employment agreements

    executed by us with certain executives. See Note 12 of the Notes to the
    consolidated financial statements included herein.

3 Represents payments required by non-cancellable purchase orders or supply

agreements related to inventory, supplies, capital expenditures and other

goods or services. The supply agreements are cancellable within a specified

number of days of written notice to the supplier. See Note 12 of the Notes to

    the consolidated financial statements included herein.


4   Represents payments required pursuant to certain licensing agreements

executed by the Company. These agreements are cancellable within a specified

number of days after communication by the Company of its intent to terminate.

See Note 12 of the Notes to the consolidated financial statements included

herein.

5 Does not include any obligations under our revolving credit facility which

was undrawn as of December 31, 2016. See Note 7 of the Notes to the

consolidated financial statements included herein.

Off-Balance Sheet Arrangements. We do not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K under the Securities Exchange Act of 1934, as amended.

Critical Accounting Policies and Estimates


This Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
that we make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. On an on-going basis, we evaluate our
judgments and estimates, including those related to bad debts, customer sales
returns, inventories, intangible assets, income taxes, revenue recognition,
contingencies and litigation. We base our judgments and estimates on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions.

Our significant accounting policies are described in Note 2 of the Notes to the
consolidated financial statements included in Item 15 of this Annual Report. We
consider the following accounting policies, which have been discussed with our
Audit Committee, to be most critical in understanding the more complex judgments
that are involved in preparing our financial statements and the uncertainties
that could impact our results of operations, financial condition and cash flows.

Revenue Recognition. We recognize product revenues when there is persuasive
evidence that an arrangement exists, the price is fixed or determinable, title
has passed and collection is reasonably assured. Product revenues are recorded
net of allowances for any discounts or rebates. Other than for sales of our
OraQuick In-Home HIV test to the retail trade, we do not grant price protection
or product return rights to our customers except for warranty returns.
Historically, returns arising from warranty issues have been infrequent and
immaterial. Accordingly, we expense warranty returns as incurred.

Our net revenues recorded on sales of the OraQuick In-Home HIV test represent
total gross revenues, less an allowance for expected returns, and customer
allowances for cooperative advertising, discounts, rebates, and chargebacks. The
allowance for expected returns is an estimate established by management, based
upon currently available information, and is adjusted to reflect known changes
in the factors that impact this estimate. Other customer allowances are at
contractual rates and are recorded as a reduction of gross revenue when
recognized in our consolidated statements of operations.



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We record shipping and handling charges billed to our customers as product revenue and the related expense as cost of products sold. Taxes assessed by governmental authorities, such as sales or value-added taxes, are excluded from product revenues.


On June 10, 2014, we entered into a Master Program Services and Co-Promotion
Agreement with AbbVie, to co-promote our OraQuick HCV test in the United
States. Pursuant to the agreement, we had granted exclusive co-promotion rights
for the OraQuick HCV test in certain markets to AbbVie and we agreed to
develop, implement, administer and maintain a patient care database for the
exclusive use of AbbVie. This patient care database was used to compile patient
information regarding new individuals who have tested positive for HCV using our
OraQuick HCV test. We also jointly agreed with AbbVie to co-promote our
OraQuick HCV test in certain market segments.

Under the terms of this agreement, we were eligible to receive up to $75.0 million in aggregate payments. We were recognizing this revenue ratably on a monthly basis over the term of the agreement, which was to terminate on December 31, 2019.


On June 30, 2016, we mutually agreed that our agreement with AbbVie would
terminate on December 31, 2016. Following the termination of the agreement,
AbbVie was relieved of its co-promotion obligations, including its obligation to
detail the OraQuick HCV test into physician offices, and has no further
financial obligations to us. We are no longer obligated to compensate AbbVie for
product detailing activities and are free to pursue arrangements with other
pharmaceutical companies to market and promote our OraQuick HCV test in the
U.S. As a result of the shortened term, the remaining associated deferred
exclusivity revenue has been recognized ratably as other revenue over the last
six months of 2016 as there are no substantive on-going obligations remaining
beyond December 31, 2016. During 2016 and 2015, $18.9 million and $13.5 million,
respectively, in exclusivity revenues were recognized and recorded as other
revenue in our consolidated statements of operations.

On June 12, 2015, we were awarded a grant for up to $10.4 million in total
funding from BARDA related to our OraQuick Ebola Rapid Antigen test. The
three-year, multi-phased grant includes 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 in additional funding for the development of our OraQuick Ebola
Rapid Antigen test. Funding received under this contract is recorded as other
revenue in our consolidated statements of operations as the activities are being
performed and the related costs are incurred. During 2016 and 2015, $1.7 million
and $1.8 million, respectively, were recognized in connection with this grant as
other revenue in our consolidated statements of operations.

In August 2016, we were awarded a contract for up to $16.6 million in total
funding from BARDA related to our rapid Zika test. The six-year, multi-phased
contract includes 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 clinical and regulatory activities. Funding received under
this contract is recorded as other revenue in our consolidated statements of
operations as the activities are being performed and the related costs are
incurred. During 2016, $616,000 was recognized in connection with this grant as
other revenue in our consolidated statements of operations.

Customer Sales Returns and Allowances. We do not grant product return rights to
our customers for any product, except for our OraQuick In-Home HIV test.
Accordingly, we have recorded an estimate of expected returns as a reduction of
gross OraQuick In-Home HIV product revenues in our consolidated statement of
operations. This estimate reflects our historical sales experience to retailers
and consumers, as well as other retail factors, and is reviewed regularly to
ensure that it reflects potential product returns. As of December 31, 2016 and
2015, the reserve for sales returns and allowances was $217,000 and $310,000,
respectively. If actual product returns differ materially from our reserve
amount, or if a determination is made that this product's distribution would be
discontinued in whole or in part by certain retailers, then we would need to
adjust our reserve. Should the actual level of product returns vary
significantly from our estimates, our operating and financial results could be
materially affected.



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Allowance for Uncollectible Accounts Receivable. Accounts receivable are reduced
by an estimated allowance for amounts that may become uncollectible in the
future. On an ongoing basis, we perform credit evaluations of our customers and
adjust credit limits based upon the customer's payment history and
creditworthiness, as determined by a review of their current credit information.
We also continuously monitor collections and payments from our customers.

Based upon historical experience and any specific customer collection issues
that are identified, we use our judgment to establish and evaluate the adequacy
of our allowance for estimated credit losses, which was $484,000 as of
December 31, 2016. While credit losses have been within our expectations and the
allowance provided, these losses can vary from period to period. Furthermore,
there is no assurance that we will experience credit losses at the same rates as
we have in the past. During 2016 we had $369,000 in write-offs 
						



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