OraSure Technologies, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Unaudited consolidated results include OraSure and wholly owned subsidiary DNA Genotek (DNAG). Amounts below are in millions except per-share data.
Business context
OraSure develops and sells diagnostic tests, specimen-collection products, oral-fluid genetic collection systems, and cryosurgical devices. Its two reportable segments are OSUR (diagnostics and medical devices) and DNAG (molecular collection systems). The filing states that interim results are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | First 9 months 2015 | First 9 months 2014 |
|---|---|---|---|---|
| Revenue | $29.9 | $27.8 | $87.3 | $77.8 |
| Gross profit | $20.7 | $18.7 | $58.4 | $48.6 |
| Gross margin | 69% | 67% | 67% | 63% |
| Operating income (loss) | $1.5 | $0.9 | $4.0 | $(2.2) |
| Net income (loss) | $1.5 | $1.1 | $3.6 | $(2.0) |
| Diluted EPS | $0.03 | $0.02 | $0.06 | $(0.04) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $15.1 | $8.4 |
- Product revenue was $25.7 million in Q3, up 5%; other revenue was $4.1 million, up 22%. For the nine-month period, product revenue grew 3% to $75.8 million, while other revenue rose to $11.5 million from $4.2 million.
- Q3 operating expenses were $19.1 million versus $17.8 million. Year-to-date expenses were $54.4 million versus $50.9 million; the prior-year period included a $5.5 million gain from a contract termination settlement.
- Cash and short-term investments totaled $108.2 million at September 30, 2015, versus $97.9 million at December 31, 2014. Working capital was $112.1 million. Cash was $100.7 million and short-term investments $7.5 million.
- Cash increased $7.8 million year to date. Investing used $4.8 million, including $1.9 million of property and equipment purchases; financing used $0.8 million, principally share repurchases for tax withholding.
- No borrowing or debt balance is reported in the supplied filing. Total liabilities were $33.8 million, including deferred revenue of $13.3 million, up from $8.0 million at year-end 2014.
Material changes and business drivers
- Q3 total revenue grew 7%; OSUR segment revenue rose 7% to $22.5 million and DNAG revenue rose 7% to $7.3 million. Year-to-date segment revenue increased 8% to $65.2 million for OSUR and 26% to $22.1 million for DNAG.
- OraQuick professional domestic HIV sales remained under pressure: down 23% in Q3 and 16% year to date, attributed to migration to fourth-generation assays, competing tests, CDC testing guidelines, and funding changes. Total OraQuick HIV revenue fell 16% in Q3 and 12% year to date.
- OraQuick HCV revenue increased 62% in Q3 and 34% year to date, as customer programs expanded and new customers were added. Intercept substance-abuse testing revenue grew 38% in Q3 and 23% year to date.
- DNAG revenue growth reflected higher commercial-market demand. Cryosurgical revenue was up 7% in Q3 but down 26% year to date; year-to-date declines reflected distributor demand, competition, and weaker international orders. Insurance risk-assessment revenue also declined.
- Year-to-date operating improvement included higher AbbVie and BARDA-related other revenue, lower royalties, and reduced OraQuick In-Home advertising and promotion. The prior-year period’s $5.5 million termination gain also makes the comparison less favorable on that basis.
- Foreign currency translation reduced comprehensive income: translation loss was $6.0 million year to date versus $2.5 million in 2014. Net income was positive, but comprehensive loss was $2.5 million year to date.
Outlook, risks, contingencies, and unusual items
- Management said current cash was expected to fund operating and capital needs for at least the next 12 months. No specific revenue or earnings guidance was provided; the company also says it does not issue or confirm outside financial forecasts.
- Management expects professional HIV sales to remain negatively affected by testing-guideline changes, funding, and competition. HCV growth may be limited by public funding, reimbursement, laboratory-test competition, and market dynamics around HCV therapies. International orders can be sporadic and funding-dependent.
- OraQuick Ebola Rapid Antigen received FDA Emergency Use Authorization in July 2015. BARDA exercised a $7.2 million funding option toward a contract of up to $10.4 million; $1.4 million of Ebola-related BARDA revenue was recognized year to date. CDC purchases for field testing were also reported, with approximately $1.5 million expected to be fulfilled by year-end.
- The AbbVie HCV co-promotion agreement runs through 2019 and provides for up to $75 million in aggregate payments. The company recognizes exclusivity payments over the contract term; $10.0 million was recognized year to date, and $12.3 million remained in deferred revenue at quarter-end. The first performance milestone was considered unlikely to be achieved.
- A one-time $1.1 million payment bought out future royalties under an OraQuick license; it is being expensed against sales through June 30, 2017. Goodwill was $19.0 million; management’s July 2015 qualitative impairment review found no likely impairment, and no indicators were identified at quarter-end.
- DNAG filed patent-related lawsuits against Ancestry.com and Spectrum. Ancestry petitioned for inter partes review of some patent claims; the expected USPTO decision on whether to initiate review was April 2016. Management said ordinary-course legal matters were not expected to have a material adverse effect, but litigation outcomes remain uncertain.
- Other risks include reliance on sole-source suppliers, customer and distributor concentration, privacy and cybersecurity exposure (including the AbbVie patient-care database), regulatory and product-approval requirements, and Canadian-dollar exposure. A 10% unfavorable CAD/USD change was estimated to increase comprehensive loss by $4.5 million using the stated Canadian net-asset exposure.
- New contractual obligations disclosed were $2.4 million of operating leases and $2.0 million of purchase obligations. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether growth in other revenue from AbbVie and BARDA is recurring, and how much deferred AbbVie revenue remains to be recognized.
- Whether DNAG’s commercial growth and HCV testing expansion can offset persistent professional HIV declines and weaker cryosurgical sales.
- Actual CDC Ebola-test order fulfillment, BARDA-funded development milestones, and progress toward FDA 510(k) clearance.
- Updates on the DNAG patent litigation and USPTO review, including any effect on the patent’s enforceability or licensing prospects.
- Exposure to supplier interruptions, international funding and distributor ordering variability, foreign exchange, and privacy or cybersecurity incidents.