Royalty Revenue Lags PCA3 Shipments? While we wait for July quarter-end results (to be published in early September), I decided to investigate whether there is a time lag from when the PCA3 test is done by the lab until CUR records the royalty revenue. If this is true, then PCA3 growth won't show up in CUR revenue immediately. I recall someone on this board saying that Fradet said European sales were slower than expected because European government health insurers were slow to reimburse for the test. I thought this might mean Gen-Probe waited to recognize revenue until the test had been reimbursed by the health insurer.
My investigation so far indicates there is no revenue lag. CUR records royalty revenue when Hologic/Gen-Probe ships the PCA3 test kit to the lab and invoices it. There is a provision for returns and other similar things. In Diagnocure's 2011 annual report in Note 2, revenue recognition policy for royalty is "The Company's [sic] recognizes royalties on its licensee's net sales when title and risk of loss has passed to the licensee's customer which is typically upon delivery to the licensee's customer ... estimated provisions for ... returns ... and when collectibility is reasonably assured."
I could not find any reference to Gen-Probe or Hologic's invoice payment terms (or prices) on the web. If anyone can find proof they offer a grace period until the health insurer reimburses the lab, I would be interested in learning about it. However, it is unlikely, because then CUR's statement "typically upon delivery" would be misleading.
I do think the actual administration of the sales reporting has some lags in it. For example, I suspect Gen-Probe mails the royalty cheque to CUR and attached an accounting for the revenue on which it is based. But they likely pay based on quarterly financial statement ledger data. Since Hologic's quarter ends on June 24th (funny date ... never seen that before) then CUR probably records as royalty for their July quarter-end the sales by Gen-Probe for the 3 months ended June, not July.
There is one other possible drag on sales of PCA3. I think it would be good marketing by Gen-Probe to give a lower price to a lab while they are just getting started. I suspect the technician will do 2-3 PCA3 tests for each sample before they get all the steps right and have a good result. The lab can only bill the patient for one test while they go through their learning curve. Otherwise the economics for the lab are poor and might be reluctant to sign on as a qualified lab.