OraSure Technologies, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Unaudited consolidated results include OraSure and wholly owned subsidiary DNA Genotek (DNAG). Amounts below are in millions of dollars unless stated otherwise.
Business context and financial performance
The company develops and sells diagnostic tests, specimen-collection products and cryosurgical devices. Its reportable segments are OSUR (diagnostics and medical devices) and DNAG (molecular collection systems).
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $32.3 | $29.9 | $92.7 | $87.3 |
| Product revenue | $25.5 | $25.7 | $78.3 | $75.8 |
| Other revenue | $6.8 | $4.1 | $14.4 | $11.5 |
| Gross profit | $22.7 | $20.7 | $64.1 | $58.4 |
| Gross margin | 70% | 69% | 69% | 67% |
| Operating income | $6.1 | $1.5 | $13.2 | $4.0 |
| Net income | $6.2 | $1.5 | $12.5 | $3.6 |
| Diluted EPS | $0.11 | $0.03 | $0.22 | $0.06 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $23.4 | $15.1 |
Q3 revenue rose 8%, primarily as other revenue increased; product revenue declined 1%. For the first nine months, revenue increased 6%, including 3% growth in product revenue and 25% growth in other revenue. Nine-month earnings improvement reflected higher revenue, better gross margin and lower sales and marketing and R&D expenses, partly offset by higher G&A.
Segments and material changes
- Q3: OSUR revenue was $23.9 million and operating income $4.6 million; DNAG revenue was $8.3 million and operating income $1.6 million. DNAG revenue increased 14%, led by commercial Oragene sales and microbiome products. OSUR product revenue fell 7%, while reported segment revenue increased 6% with higher other revenue.
- Nine months: OSUR revenue was $69.1 million and operating income $9.1 million; DNAG revenue was $23.6 million and operating income $4.1 million. DNAG revenue grew 7%; OSUR revenue grew 6% including other revenue.
- Growth in international HIV/HCV tests, molecular collection systems and cryosurgical products was partly offset by weaker domestic professional HIV sales, lower risk-assessment sales and no 2016 Ebola test sales comparable to 2015.
- AbbVie co-promotion agreement for the HCV test was mutually shortened: it will end December 31, 2016, rather than 2019. The remaining deferred exclusivity revenue was recognized ratably during the second half of 2016. AbbVie has no further financial obligations after termination.
Cash, liquidity and debt
- At September 30, cash and cash equivalents were $111.7 million, restricted cash $1.8 million and short-term investments $7.6 million—$121.2 million combined. Working capital was $128.8 million, versus $111.5 million at December 31, 2015.
- Nine-month operating cash flow was $23.4 million. Investing activities used $3.5 million, including $3.5 million of capital expenditures; financing activities used $2.8 million, including share repurchases and credit-facility fees. Cash and cash equivalents increased $17.6 million during the period.
- No borrowings were outstanding under the new Wells Fargo revolving facility at quarter-end. Initial commitments are up to $10 million, with a potential additional $5 million subject to lender approval. The facility matures September 30, 2019; the company reported covenant compliance.
- Management said cash and available borrowing capacity should fund current operating and capital needs for the foreseeable future. There was no material change in contractual obligations other than the new credit agreement, and no off-balance-sheet arrangements were reported.
Outlook, risks and unusual items
- No specific financial forecast or formal guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- A six-year BARDA contract for the rapid Zika test provides up to $16.6 million: an initial $7.0 million commitment and up to $9.6 million in options. Revenue is recognized as funded activities are performed; $0.2 million was recognized in Q3 2016.
- In Q4 2016, the company finalized and presented a restructuring plan, expected to result in $1.4 million of charges, largely workforce-related severance and benefits.
- Management cited risks including CDC testing guidance and competition affecting domestic HIV sales; uncertain government funding, reimbursement and market adoption for HCV testing; variability of international orders; reliance on sole-source suppliers; customer concentration; foreign-exchange exposure; regulatory and product-development execution; and litigation. One customer represented approximately 19% of Q3 revenue.
- Patent disputes involving DNAG, Ancestry.com and Spectrum remained active. After quarter-end, a court denied DNAG’s preliminary-injunction motion in one Spectrum case and stayed that case pending patent-office review. The company said ordinary-course legal matters were not expected to materially adversely affect results, but outcomes remain uncertain.
- A 10% unfavorable Canadian-dollar exchange-rate movement would have reduced nine-month comprehensive income by an estimated $4.7 million. The company had no currency hedges at September 30.
Most important facts for investors to verify
- Whether core product revenue and domestic professional HIV sales stabilize, and whether international growth is repeatable rather than order-timing dependent.
- How much 2016 earnings benefited from accelerated AbbVie exclusivity revenue, and the revenue and cost implications after the agreement ends.
- BARDA Zika contract milestones, option funding, development progress and associated costs.
- Actual restructuring charges and execution, as well as continuing segment margins and cash generation.
- Developments in the Ancestry/Spectrum patent cases and related patent-office reviews.
- Customer concentration, critical supplier continuity, credit-facility availability and compliance, and Canadian-dollar exposure.