Business context and reporting period
OraSure Technologies, Inc. filed this Form 10-K for the fiscal year ended December 31, 2019. Its two segments are OSUR, which sells diagnostic tests and specimen-collection products, and DNAG, which sells molecular collection products and genomics and microbiome services. This annual filing also reports unaudited fourth-quarter results.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Net revenue | $154.6 million | $181.7 million |
| Gross profit / margin | $94.6 million / 61% | $113.6 million / 63% |
| Operating income | $18.6 million | $28.4 million |
| Net income | $16.7 million | $20.4 million |
| Diluted earnings per share | $0.27 | $0.33 |
| Cash from operating activities | $9.8 million | $39.1 million |
| Cash, cash equivalents and available-for-sale securities | $189.8 million | $201.3 million |
| Working capital | $191.8 million | $191.3 million |
Revenue fell 15%; gross margin declined by 2 percentage points. Operating margin was approximately 12.0%, compared with 15.6% in 2018. The company had no bank borrowings and terminated its credit agreement in March 2019. At year-end it reported $7.2 million of lease liabilities and $3.6 million of acquisition-related contingent consideration obligations.
Fourth-quarter results
Q4 2019 revenue was $49.7 million, versus $50.2 million in Q4 2018. Operating income was $4.1 million versus $12.5 million, and net income was $2.4 million versus $10.3 million. The filing identifies a $10.1 million gain on the cryosurgical business sale in Q3 2019, not Q4.
Material changes versus 2018
- DNAG segment revenue decreased 21% to $76.4 million; genomics revenue fell 28% to $57.4 million, primarily because a major consumer-genomics customer changed promotions and reduced purchases.
- Microbiome revenue increased 91% to $12.8 million, including contributions from acquired laboratory-services businesses.
- OSUR segment revenue decreased 9% to $78.2 million. Infectious-disease testing sales increased 3%, with international HIV self-test and domestic HCV growth partly offset by lower domestic HIV sales.
- Other revenue declined 60% to $6.5 million, including lower royalty income and reduced research funding and Gates Foundation reimbursements.
- Operating cash flow fell substantially, reflecting lower earnings and working-capital movements, including increased receivables and reduced accrued liabilities.
Outlook, risks and unusual items
Management said cash and investments were expected to fund current and foreseeable operating and capital needs; no specific revenue or earnings guidance is provided. The company acquired CoreBiome and Novosanis in January and Diversigen in November, spending $23.8 million in aggregate. It sold its cryosurgical business in August for $12.0 million and recorded a $10.1 million pretax gain. The three acquisitions contributed a combined $6.2 million of 2019 revenue from their respective acquisition dates and reported losses since acquisition.
Key risks include reliance on a small number of customers (one customer represented about 15% of 2019 revenue), continued weakness in consumer ancestry testing, competitive and pricing pressure, dependence on government and public-health funding, regulatory approvals and compliance, and sole-source or limited-source suppliers. Integration and performance of the acquired businesses, foreign currency exposure, and the coronavirus outbreak’s potential effects on operations, customers and suppliers were also identified as risks. The company disclosed an arbitration decision in February 2020 that found potential new Ancestry products did not infringe DNAG patents; those products therefore would not generate royalties under the settlement agreement.
Reported 2019 earnings included the cryosurgical-sale gain, a $0.7 million noncash benefit from remeasurement of contingent consideration, and $1.8 million of acquisition costs. Management reported effective disclosure controls and internal control over financial reporting; the acquired companies, representing 11.7% of assets and 4.0% of revenue, were excluded from the year-end internal-control assessment pending integration in 2020. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether the major genomics customer’s amended purchase agreement and lower annual volumes support a recovery in DNAG revenue.
- Whether microbiome services and products can scale and whether the acquired businesses can be integrated profitably.
- How much of reported operating income and earnings reflects recurring operations rather than the $10.1 million divestiture gain and other unusual items.
- Whether operating cash flow improves and whether the $2.7 million doubtful-account allowance, including exposure to a large Chinese genomics customer, proves adequate.
- Progress on Intercept i2 product modifications and regulatory clearance, and the commercial outlook for HIV, HCV and microbiome offerings.
- Exposure to acquisition-related contingent payments, customer concentration, supply constraints and the $90.7 million of cash and investments held by the Canadian subsidiary, which may face tax consequences if repatriated.