OraSure Technologies, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited consolidated results; amounts below are in millions of dollars unless noted. OraSure sells diagnostic tests and specimen-collection products through its OSUR business, and molecular collection systems through DNA Genotek (DNAG).
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $24.3 | $22.6 | $45.5 | $43.6 |
| Gross margin | 60% | 65% | 58% | 65% |
| Operating loss | $(5.6) | $(3.5) | $(16.2) | $(7.2) |
| Net loss | $(5.3) | $(3.6) | $(15.5) | $(6.8) |
| Loss per diluted share | $(0.10) | $(0.07) | $(0.28) | $(0.14) |
- First-half product revenue rose 7%; licensing and product-development revenue fell 68% to $0.5 million, mainly because there was no repeat of a $1.0 million Merck HCV collaboration milestone received in Q1 2012. That collaboration had been terminated.
- Q2 revenue increased 8%, led by infectious disease testing and DNAG. In Q2, DNAG revenue rose 39% to $4.7 million; OSUR revenue rose 2% to $19.7 million. First-half DNAG revenue increased 29% to $8.6 million, while OSUR revenue was approximately flat at $36.9 million.
- First-half sales and marketing expense rose 68% to $22.8 million, including $12.3 million of OraQuick In-Home HIV advertising and promotional costs, versus $2.9 million a year earlier. Management attributed much of the increased operating loss to commercialization spending.
- Cash was $77.0 million at June 30, down from $87.9 million at year-end 2012; working capital was $91.7 million, down from $103.5 million. Operating cash use was $9.3 million, compared with $2.3 million in the first half of 2012. Capital expenditures were $1.1 million; financing used $0.5 million.
- The balance sheet lists no debt balance or long-term debt obligation. Current liabilities were $16.0 million. Management said cash was expected to fund operating and capital needs for at least the next 12 months.
Changes, outlook and risks
- Gross margin fell year over year, reflecting higher royalties, less favorable product mix, and—over the first half—scrap and spoilage costs associated with production issues identified and corrected in Q1. Q2 OSUR margin was 59% versus 65%; DNAG margin was 62% versus 67%.
- OraQuick In-Home HIV generated $3.4 million of net revenue in the first half. Professional domestic HIV sales declined 5%, with management citing purchase timing, reduced public funding, a shift to automated laboratory tests, and price competition. Intercept drug-testing sales were also pressured by distributors selling competing products.
- Management cited potential HCV testing opportunity following the USPSTF’s June 2013 B-grade screening recommendation for at-risk people and people born 1945–1965; the recommendation was expected to take effect in 2014. Management also cautioned that HCV demand depends on funding and building awareness.
- OraSure’s Reckitt Benckiser distribution contract had expired; renewal terms were under negotiation. Royalties under a separate cryosurgical patent license were expected to cease after certain patents expired in August 2013.
- Key risks include reliance on public funding among customers, competition and market acceptance of new products, regulatory and manufacturing requirements, sole-source suppliers, distributor ordering and inventory levels, foreign-exchange exposure, and the company’s history of losses. Management reported no material changes to the risk factors in its 2012 Form 10-K and no significant changes to contractual obligations or off-balance-sheet arrangements.
- No specific revenue or earnings guidance was provided. Management noted that cash needs could vary with promotional spending, R&D, acquisitions, regulatory work, litigation, and market acceptance.
Investor verification priorities
- Track whether OraQuick In-Home HIV sales and customer sell-through justify the elevated advertising spend, and how much deferred revenue remains tied to retail return rights.
- Assess whether gross margins recover after the Q1 production issues and whether higher royalties or product-mix changes persist.
- Monitor operating cash burn against management’s at-least-12-month liquidity statement, including working-capital trends.
- Check progress on the Reckitt Benckiser contract renewal, post-August 2013 cryosurgical royalties, and any replacement for terminated Merck collaboration revenue.
- Evaluate the durability of DNAG growth and the continuing impact of distributor competition and constrained public or research funding.