ORASURE TECHNOLOGIES INC quarterly report, Q1 FY2016

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OraSure Technologies, Inc. — Q1 2016 Form 10-Q

Reporting period: Three months ended March 31, 2016; unaudited. Comparisons are with the three months ended March 31, 2015 unless otherwise noted. Amounts are in millions of dollars except per-share data.

Business context

OraSure develops, manufactures and sells diagnostic tests, specimen-collection products and cryosurgical devices. Its two reportable businesses are OSUR (diagnostics, collection and medical devices) and DNAG (molecular collection systems, including oral-fluid collection devices).

Financial performance and liquidity

  • Revenue: $29.1, up 7% from $27.1. Product revenue was $25.2, up 6%; other revenue was $3.8, including $3.3 of ratable AbbVie HCV co-promotion revenue and $0.5 recognized under the BARDA Ebola-test grant.
  • Profitability: Gross profit was $20.3 versus $17.0; gross margin was 70% versus 63%. Operating income was $2.7, compared with an operating loss of $0.3. Net income was $2.4 versus $0.1; diluted EPS was $0.04 versus $0.00.
  • Cash flow: Operating activities provided $4.7, versus $6.6 used in Q1 2015. Investing activities used $1.6, mainly for $1.6 of property and equipment purchases; financing activities used $3.2, including $2.7 of share repurchases. Cash increased $0.5 to $94.6.
  • Liquidity and balance sheet: Cash and short-term investments totaled $102.2 at March 31, compared with $101.3 at December 31, 2015. Working capital was $114.0. Current assets were $134.3 and current liabilities $20.3. The balance sheet presents no debt line item; the filing text does not provide a separate debt balance.
  • Other metrics: Total assets were $188.5 and stockholders’ equity was $163.0. Capital expenditures were $1.6. The company repurchased 423,000 shares under its existing program for $2.7, at an average $6.29 per share.

Material changes versus prior year

  • OSUR product revenue increased 8% to $18.4; DNAG revenue increased 3% to $6.9. OSUR operating income improved to $1.6 from a $1.5 loss, while DNAG operating income declined to $1.1 from $1.2.
  • Cryosurgical systems revenue rose 53% to $3.9, and total OraQuick HIV/HCV product revenue increased 3% to $11.0. HCV revenue grew 34% to $2.9, while HIV revenue fell 5% to $8.1.
  • Gross margin improvement reflected a more favorable product mix, lower royalty and scrap/spoilage costs, and BARDA-related funding. Lower R&D expense also contributed to the operating improvement; higher sales and marketing and G&A expenses partly offset it.
  • Operating cash flow improved from use of $6.6 to generation of $4.7, supported in part by collections of receivables and lower inventory. The quarter also included a $2.5 reduction in deferred revenue, primarily from recognition of AbbVie payments.

Outlook, risks and contingencies

Management said current cash and cash equivalents should fund operating and capital needs for the foreseeable future, while noting cash requirements may vary with R&D, acquisitions, regulatory work, litigation, capital spending and commercial activities. The filing provides no quantified revenue or earnings guidance.

  • Management expects professional HIV sales to remain pressured by CDC testing guidelines, competing tests, funding changes and price competition. HCV growth may be constrained by limited public funding, reimbursement, competing laboratory tests and market development needs.
  • The AbbVie agreement may provide up to $75.0 in aggregate payments through 2019, with potential additional performance-based milestones. The first milestone period ended in 2015 and was not achieved; under certain circumstances, termination could occur as early as December 31, 2016.
  • BARDA awarded up to $10.4 for development of the OraQuick Ebola Rapid Antigen test; $7.2 of additional funding had been exercised by September 2015. Funding revenue is recognized as related activities and costs occur.
  • DNAG has patent litigation against Ancestry.com and Spectrum concerning oral-fluid DNA collection devices. The USPTO instituted inter partes review of some claims of DNAG’s patent; a final decision was expected by April 8, 2017. Management stated ordinary-course legal matters were not expected to materially harm results, but litigation outcomes remain uncertain.
  • Other disclosed risks include reliance on sole-source suppliers, customer and distributor ordering variability, competition, regulatory and product-development execution, and Canadian-dollar exposure. A 10% unfavorable Canadian-dollar exchange-rate change would have reduced quarterly comprehensive income by $4.6.

The company reported no material changes to the risk factors in its 2015 Form 10-K, no significant changes to contractual obligations, and no off-balance-sheet arrangements. Management concluded disclosure controls were effective as of March 31, 2016.

Important facts for investors to verify

  • Whether higher cryosurgical and HCV sales can persist, and whether HIV declines or DNAG commercial-market softness deepen.
  • How much future revenue and cash flow depend on AbbVie exclusivity payments and BARDA-funded work, including the timing and conditions of potential agreement termination or milestones.
  • Progress and potential financial effects of the Ancestry and Spectrum patent cases and the USPTO review.
  • Whether the 70% gross margin and positive operating cash flow are sustainable, given product mix and working-capital movements.
  • Exposure to sole-source suppliers, customer concentration and Canadian-dollar fluctuations; the filing reports one customer at approximately 12% of quarterly revenue.