ORASURE TECHNOLOGIES INC quarterly report, Q1 FY2020

OraSure Technologies, Inc. — Q1 2020 Form 10-Q

Reporting period: Three months ended March 31, 2020. Unaudited consolidated results; financial amounts below are in millions of dollars unless stated otherwise. OraSure operates OSUR diagnostics and DNAG molecular products and services businesses.

Key financial results

• Revenue grew 5%; product and services revenue increased 9%. DNAG revenue rose 16% to $13.8 million, while OSUR revenue declined 2% to $17.8 million.
• Product trends included OraQuick revenue of $13.8 million versus $11.6 million, Oragene of $9.6 million versus $4.2 million, and microbiome laboratory services of $2.4 million versus $0.7 million. Cryosurgical revenue was absent following the 2019 business sale.
• Gross margin fell to 51% from 60%, attributed to product mix, higher international freight costs and scrap/spoilage, and lower other revenue, which had contributed fully to gross profit.
• Operating expenses rose to $24.2 million from $21.9 million, including higher R&D, legal and administrative costs and acquired Diversigen expenses. Q1 2020 included a $1.1 million noncash charge for revaluing acquisition-related contingent consideration.
• At March 31, cash and cash equivalents were $83.4 million and available-for-sale securities were $92.8 million. Current assets were $223.4 million and current liabilities $26.3 million; reported working capital was $197.1 million. The company reported no conventional borrowings; lease liabilities totaled $6.8 million.
• Total assets were $325.1 million, total liabilities $34.9 million, and stockholders’ equity $290.2 million. Cash, cash equivalents and investments decreased from $189.8 million at year-end 2019; the company said these resources were sufficient for foreseeable operating and capital needs.
• Operating cash flow benefited from $8.6 million of accounts-receivable collections and other working-capital movements. Investing cash flow was $14.1 million provided, mainly reflecting net investment maturities; financing cash flow was $4.6 million used, including $3.0 million of contingent-consideration payments.

Material changes and management commentary

• OraQuick international HIV sales increased 74%, while HCV revenue declined 21%. Genomics product revenue increased 14%; laboratory-services growth reflected Diversigen, acquired in late 2019.
• Management said COVID-19-related closures and social-distancing measures reduced HIV/HCV testing, workplace drug testing, academic research and clinical activity, and delayed some international shipments. The company expected these pressures to continue for an indeterminate period.
• Management also reported increased demand for OraQuick In-Home HIV tests and saliva collection products. In April 2020, after quarter-end, OraSure received a BARDA contract for $710,310 to develop a rapid in-home pan-SARS-coronavirus self-test. It was also developing a laboratory-based antibody test and validating existing collection products for COVID-19 use; success, regulatory authorization and commercial uptake were uncertain.
• Of cash, cash equivalents and available-for-sale securities, $69.2 million, or 39%, was held by the Canadian subsidiary; repatriation above certain levels could have adverse tax consequences. A 10% unfavorable movement in the Canadian dollar and euro against the U.S. dollar was estimated to reduce quarterly comprehensive income by approximately $9.0 million.
• The company recorded a $712,000 income tax expense, primarily foreign tax, and maintained a full valuation allowance against its U.S. deferred tax assets.
• An arbitration panel ruled in February 2020 that certain potential Ancestry products did not infringe DNAG patents and would not be subject to royalties under the settlement agreement. The panel’s decision was final and binding.

Outlook, risks and contingencies

• No numerical revenue or earnings guidance was provided. Management cited uncertainty about the duration and severity of COVID-19 and its effects on customers, suppliers, testing programs and research activity.
• Key risks include dependence on sole-source or third-party suppliers, possible supply-chain disruptions, customer and public-funding pressures, foreign exchange exposure, acquisition integration and contingent-consideration estimates, and the need for clinical validation and regulatory approvals for new products and uses.
• OraSure said ordinary-course legal matters were not expected to have a material adverse effect. The filing also notes that up to $22.5 million of contingent consideration could be payable over the next year and a half, subject to contractual terms and performance criteria.
• Disclosure controls were judged effective as of March 31, 2020, with no material change in internal control over financial reporting reported for the quarter.

Important facts for investors to verify

1. Track the extent and duration of COVID-19-related declines in traditional testing and research markets, against any demand for at-home tests and saliva collection products.
2. Verify development, validation, FDA authorization and commercialization milestones for coronavirus tests and expanded collection-product uses, including the BARDA contract’s scope and funding terms.
3. Monitor gross-margin recovery, operating expenses, and whether revenue growth can translate into improved operating results and cash generation.
4. Review contingent-consideration payments and valuation changes, as well as the company’s ability to meet potential future payments.
5. Reconcile liquidity figures: the filing reports $176.2 million of cash, cash equivalents and securities in one discussion and $176.4 million elsewhere; it also gives working capital as $197.1 million in the balance-sheet-derived table and $197.3 million in MD&A. The filing text does not explain these differences.
6. Assess exposure to Canadian-dollar and euro movements, overseas cash repatriation, and reliance on critical third-party suppliers.