OraSure Technologies, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Financial figures are in U.S. dollars. The filing was signed November 9, 2012.
Business context
OraSure develops and sells oral-fluid diagnostic tests and specimen-collection products, cryosurgical devices, and genetic-material collection kits through its DNA Genotek (DNAG) subsidiary. OraQuick In-Home HIV Test received FDA approval in July 2012 and entered the U.S. over-the-counter market in October. DNAG was acquired in August 2011, making year-over-year comparisons less directly comparable.
Financial results
| Metric | Q3 2012 | Q3 2011 | First 9 months 2012 | First 9 months 2011 |
|---|---|---|---|---|
| Revenue | $22.1 million | $21.7 million | $65.7 million | $58.2 million |
| Gross profit | $13.9 million | $13.6 million | $42.3 million | $37.1 million |
| Gross margin | 63% | 63% | 64% | 64% |
| Operating loss | $2.9 million | $4.2 million | $10.1 million | $9.1 million |
| Net loss | $2.4 million | $3.9 million | $9.2 million | $9.0 million |
| Loss per share, diluted | $0.04 | $0.08 | $0.18 | $0.19 |
- Q3 revenue rose 2%; nine-month revenue rose 13%. The nine-month increase primarily reflected $10.0 million of DNAG revenue in 2012 versus $2.0 million in the comparable 2011 period, when DNAG was included only after its August acquisition.
- Q3 operating loss narrowed by $1.3 million, helped by lower R&D and G&A costs, partly offset by increased sales and marketing. Nine-month operating loss widened by $1.0 million, primarily as sales and marketing and G&A costs rose, partly offset by lower R&D.
- Q3 OraSure segment revenue fell 5%, while DNAG revenue increased 66% to $3.4 million. For nine months, OraSure revenue declined 1%, while DNAG contributed $10.0 million. Within OraSure, cryosurgical revenue grew strongly, while infectious-disease, substance-abuse, and insurance-risk-assessment revenue declined.
- Q3 sales and marketing expense increased to $8.6 million from $5.7 million, including about $1.8 million for the In-Home HIV Test launch. For the first nine months, it increased to $25.5 million from $16.0 million, including about $4.7 million in launch spending. Nine-month R&D expense declined to $9.6 million from $15.1 million, chiefly due to lower In-Home HIV clinical-trial costs.
Cash, debt, and liquidity
- Cash was $89.4 million at September 30, 2012, up from $23.9 million at December 31, 2011; working capital was $106.6 million versus $30.9 million.
- Operating activities used $4.0 million of cash in the first nine months, compared with $4.1 million in 2011. Investing activities used $1.4 million, primarily for property and equipment.
- Financing activities provided $70.9 million, primarily from $70.3 million of net proceeds from a July public offering of 6.1 million shares and $9.5 million from option exercises, partly offset by debt repayment and share withholding.
- The company repaid $7.0 million outstanding under its Comerica credit facility in July; no further borrowing was available under that facility. No long-term debt remained on the September 30 balance sheet.
- Management expected cash to fund current operating and capital needs for at least the next 12 months, while noting that needs could change with acquisitions, manufacturing expansion, R&D, commercialization, and other factors.
Outlook, risks, and unusual items
- Management expected the In-Home HIV Test launch, national advertising, and customer-support operations to materially increase sales and marketing expenses in Q4 2012 and 2013, particularly Q1 2013. The company initially recognized revenue on this product only when sold to retail customers, given its lack of return history. At September 30, $3.6 million related to late-September retailer shipments was recorded in accounts receivable and deferred revenue; the filing reported no material recognized revenue from the product by that date.
- OraQuick domestic HIV revenue continued to face reduced public-health funding, purchase-timing changes, price competition, and substitution by automated laboratory tests. Management also cited intense competition in HIV, HCV, substance-abuse, and genetic-collection markets.
- A major laboratory distributor was expected to stop buying Intercept by year-end 2012, and the U.K. distributor was reducing purchases as it sold a competing product. The Reckitt Benckiser cryosurgery distribution contract had expired and renewal terms remained under negotiation.
- OraQuick professional-market sales were scheduled to incur higher lateral-flow patent royalties from January 2013 through February 2015, pressuring margins. Royalties under a separate cryosurgical patent license were expected to end after certain patents expire in August 2013.
- Management identified dependence on sole-source suppliers and contract manufacturers, distributor performance, product and regulatory execution, market acceptance, foreign-exchange exposure, and government funding as risks. It also discussed a 2.3% U.S. medical-device excise tax scheduled for 2013 and potential Medicare spending cuts.
- The annual goodwill impairment assessment found no impairment, but DNAG’s estimated fair value exceeded carrying value by approximately 13%; management cautioned that future results differing from assumptions could lead to an impairment charge. Ordinary-course legal matters were not expected to materially affect financial position or results.
Important facts for investors to verify
- Consumer sell-through, returns, and revenue recognition for the OraQuick In-Home HIV Test, including the treatment of the $3.6 million late-September retailer shipments.
- Whether the new HIV-test launch generates sales sufficient to offset its higher marketing costs and the pressure from lower public-health testing demand.
- Replacement channels and revenue impact as laboratory distributors reduce or end Intercept purchases; status of the Reckitt Benckiser contract renewal.
- Cash use and operating performance after the equity offering, given ongoing losses and the absence of an available credit-facility borrowing capacity.
- DNAG growth and integration, including the assumptions supporting the relatively narrow goodwill fair-value cushion, and any effects of foreign-exchange movements.
- Margin impact from increased OraQuick royalties beginning in 2013 and the scheduled medical-device excise tax.