OraSure Technologies, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Comparisons are with Q1 2016 unless otherwise noted. OraSure develops and sells diagnostic products and specimen-collection devices through its OSUR and DNAG (molecular collection systems) businesses.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net revenue | $32.5 million | $29.1 million | +12% |
| Product revenue | $31.5 million | $25.2 million | +25% |
| Gross profit / margin | $20.3 million / 62% | $20.3 million / 70% | Margin down 8 points |
| Operating income | $15.9 million | $2.7 million | Includes $12.5 million litigation-settlement gain |
| Net income | $12.4 million | $2.4 million | EPS: $0.21 diluted vs. $0.04 |
| Operating cash flow | $12.6 million | $4.7 million | 2017 includes settlement proceeds |
Revenue growth was driven by molecular-product sales and higher international HIV and HCV test sales. Other revenue fell to $1.1 million from $3.8 million, primarily because the AbbVie HCV co-promotion agreement ended in December 2016; Q1 2016 included $3.4 million of exclusivity revenue. Gross margin declined amid the absence of that revenue, increased scrap and spoilage, and a higher mix of lower-margin sales. The $12.5 million Ancestry settlement was recorded as a reduction of operating expenses; excluding that gain, reported operating income would have been approximately $3.4 million.
Segments and material changes
- OSUR: Revenue was $21.8 million, down 2% overall; product revenue rose 13% to $20.8 million. Infectious-disease testing revenue increased 28%, led by international HIV and HCV sales. Domestic professional HIV sales fell 33%, cryosurgical revenue fell 21%, and OSUR reported an operating loss of $0.2 million.
- DNAG: Revenue increased 55% to $10.7 million, reflecting stronger commercial Oragene sales and microbiome-product revenue. Academic-market sales declined. Segment operating income was $16.1 million, substantially reflecting the settlement gain.
- International customers generated $11.7 million, or 36% of revenue, versus $6.9 million, or 24%, a year earlier. International HIV and HCV orders can be sporadic and dependent on government funding and other factors.
Cash, liquidity and debt
- At March 31, cash and cash equivalents were $120.9 million, restricted cash was $1.8 million, and short-term investments were $18.8 million; combined cash, restricted cash and investments totaled about $141.5 million. Working capital was $162.3 million.
- Operating activities provided $12.6 million; investing activities used $8.4 million, including $7.5 million for short-term investments and $0.9 million for property and equipment. Financing activities provided $8.6 million, including $9.4 million from option exercises, partly offset by $0.9 million for shares withheld for taxes.
- No borrowings were outstanding under the $10 million revolving credit facility. The company could request up to $5 million of additional commitments at the lender’s discretion; the facility matures September 2019. OraSure reported covenant compliance and expected available cash and borrowing capacity to fund needs for the foreseeable future.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management says liquidity is expected to cover current operating and capital needs for the foreseeable future, while noting that cash requirements may vary.
- OraSure reported a contract to supply more than $20 million of DNA saliva-collection kits to a genomics customer over a period exceeding 12 months; timing and fulfillment remain relevant to monitor.
- The Ancestry/Spectrum litigation was settled effective February 6, 2017. OraSure received $12.5 million and granted Ancestry a limited royalty-bearing license; the agreement also provides OraSure a royalty-free license to certain Ancestry patents. Related lawsuits and patent-review proceedings were dismissed or terminated.
- Key risks include reliance on government funding and uneven international orders, competition and changing testing guidelines, sole-source suppliers, regulatory and product-development execution, patent matters, and foreign-exchange exposure. The company reported no material change to its previously disclosed risk factors.
- A 10% unfavorable Canadian-dollar exchange-rate movement would have reduced Q1 comprehensive income by $5.9 million, according to the filing. One customer represented 22% of accounts receivable at quarter-end.
Important facts for investors to verify
- Whether DNAG’s greater-than-$20 million supply contract converts into shipments and revenue on the expected schedule.
- Whether strong international HIV/HCV and molecular-product sales persist, given ordering variability and funding dependence.
- Underlying profitability and margins excluding the one-time $12.5 million settlement gain, and the drivers of lower gross margin.
- Collection timing for international receivables and the concentration of receivables with a major customer.
- Settlement-license royalty terms, future patent-related developments, and exposure to Canadian-dollar movements and sole-source suppliers.