OraSure Technologies, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts below are in U.S. dollars; financial statement figures have been converted from thousands to millions unless otherwise stated.
Business context and reporting period
OraSure develops and sells infectious-disease diagnostics and specimen-collection products (OSUR segment), and molecular collection kits, genomics and microbiome products, and laboratory services (DNAG segment). The COVID-19 pandemic disrupted traditional testing, research activity, and shipments, while creating demand for collection devices used in COVID-19 testing. The company sold its cryosurgical systems business in August 2019.
Financial results and liquidity
- Q2 revenue: $29.3 million, down 25% from $38.8 million. Product and services revenue was $28.3 million, down 24%; other revenue was $0.9 million, down 41%.
- Q2 revenue mix: OSUR segment revenue was $10.4 million, down 49%; DNAG segment revenue was $18.8 million, up 2%. DNAG recorded $8.5 million of COVID-19-related collection-device revenue. Genomics and microbiome revenue fell 54% and 59%, respectively.
- Q2 profitability: Gross profit was $17.3 million, with a 59% gross margin versus 64% a year earlier. Operating loss was $9.4 million versus operating income of $5.3 million; net loss was $10.5 million, or $0.16 per share, versus net income of $4.4 million, or $0.07 per share.
- First-half revenue: $60.9 million, down 12% from $68.9 million. OSUR revenue was $28.2 million, down 27%; DNAG revenue was $32.6 million, up 8%. COVID-19-related product revenue was $8.9 million for the half.
- First-half profitability and cash flow: Gross profit was $33.4 million and gross margin was 55%, down from 63%. Operating loss was $17.4 million versus operating income of $1.5 million; net loss was $17.8 million, or $0.28 per share, versus net income of $1.1 million, or $0.02 per share. Operating cash flow was negative $2.2 million versus positive $4.7 million.
- Liquidity: Cash and cash equivalents were $173.9 million and available-for-sale investments were $91.9 million at June 30, totaling $265.8 million, compared with $189.8 million at year-end 2019. Working capital was $287.4 million. Management said these resources should fund current and foreseeable operating and capital needs.
- Debt and obligations: The filing reports no borrowings outstanding; lease liabilities totaled $6.9 million ($5.2 million operating leases and $1.7 million finance leases). Total liabilities were $39.1 million.
Material changes versus the prior comparable period
- COVID-19 restrictions reduced HIV and HCV testing, workplace and insurance risk-assessment testing, and genomics and microbiome research demand. International shipping delays also affected sales.
- COVID-19 collection-device revenue and higher laboratory-services revenue partly offset declines in established products. First-half laboratory-services revenue rose 117%, partly reflecting the inclusion of Diversigen, acquired in November 2019.
- Lower production utilization, product mix, international freight costs, scrap and spoilage, and the absence of higher-margin cryosurgical sales reduced gross margin. Operating expenses also increased, including COVID-19 research and development spending.
- The company raised approximately $95.0 million net in a June public offering of 9.2 million shares at $11 per share, increasing cash and shares outstanding.
Outlook, management commentary, risks and unusual items
- Management expects COVID-19 to continue materially and adversely affecting some business areas for an indeterminate period. It said the extent to which COVID-19-related opportunities offset lost revenue cannot be predicted with certainty.
- OraSure was developing a rapid pan-SARS-coronavirus self-test and a laboratory-based SARS-CoV-2 antibody test, with BARDA funding of approximately $0.71 million and $0.63 million, respectively, as stated in the filing. It expected to seek FDA Emergency Use Authorization and, if authorized, launch both in Q4 2020. These were forward-looking expectations, not completed approvals or launches.
- Several OraSure collection devices had been included in EUAs granted to third-party testing laboratories. Such authorizations are subject to conditions and may be revoked; OraSure’s own proposed tests remained under development.
- On July 22, 2020, after quarter-end, OraSure acquired UrSure for an initial purchase price of approximately $3.1 million, with additional contingent payments tied to future performance.
- First-half results included a $0.45 million noncash charge from remeasuring acquisition-related contingent consideration and $0.34 million of UrSure-related transaction costs. The quarter also included a $0.66 million noncash benefit from the contingent-consideration remeasurement.
- Key risks include the duration and effects of the pandemic, dependence on sole-source and third-party suppliers, regulatory and EUA requirements, uncertain adoption of new products and microbiome services, customer and distributor credit risk, and foreign-currency exposure. A 10% unfavorable exchange-rate change was estimated to reduce first-half comprehensive income by approximately $9.8 million. Management reported no legal proceedings expected to have a material adverse effect and said disclosure controls were effective.
Important facts for investors to verify
- Whether COVID-19-related sales persist and meaningfully offset declines in HIV, HCV, risk-assessment, genomics, and microbiome demand.
- Actual timing, regulatory status, launch, demand, and economics of the two company-developed COVID-19 tests; the stated Q4 2020 launch timing was conditional on EUA.
- Whether gross margins and operating results recover as manufacturing utilization and product mix change, and whether higher R&D and operating costs continue.
- The quality and concentration of receivables, including one customer representing 12% of accounts receivable at June 30, and the company’s exposure to third-party suppliers and international shipping.
- Cash deployment, dilution from the 9.2 million-share offering, UrSure acquisition costs and contingent payments, and the contingent consideration remaining from earlier acquisitions.
- The filing’s figures for BARDA funding are stated as $710,310 and $629,217; investors should confirm the precise award amounts and funding terms in the referenced agreements.