Business Context and Reporting Period
OraSure Technologies, Inc. filed this Form 10-K for the fiscal year ended December 31, 2017. The company operates two segments: OSUR, which sells diagnostic tests, specimen-collection devices and cryosurgical products, and DNAG, which sells molecular collection systems, principally through its Canadian subsidiary DNA Genotek.
Because the filing is an annual report, the summary covers FY 2017; selected fourth-quarter results are also shown below. Amounts are in U.S. dollars.
Financial Performance and Liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net revenue | $167.1 million | $128.2 million |
| Product revenue | $162.0 million | $106.9 million |
| Gross margin | 59% | 69% |
| Operating income | $40.2 million | $20.3 million |
| Net income | $30.9 million | $19.7 million |
| Diluted EPS | $0.51 | $0.35 |
| Cash provided by operating activities | $28.2 million | $24.6 million |
FY 2017 fourth-quarter revenue was $52.0 million, operating income $10.2 million, net income $7.3 million and diluted EPS $0.12. In Q4 2016, the respective figures were $35.5 million, $7.1 million, $7.2 million and $0.13.
- Revenue mix and segments: OSUR segment revenue was $92.0 million, down 4% including other revenue; DNAG revenue was $75.1 million, up 133%. Product revenue rose 51% overall.
- Margins and profit: Gross margin declined to 59% from 69%, reflecting the absence of AbbVie exclusivity revenue, more lower-margin international product sales, and higher scrap and spoilage. Operating income included a $12.5 million gain from settlement of litigation with Ancestry.com and its contract manufacturer.
- Cash, working capital and debt: Cash, cash equivalents, restricted cash and available-for-sale securities totaled $176.6 million at year-end, versus $120.9 million a year earlier; working capital was $189.7 million. The revolving credit facility was undrawn, with up to $10 million initially available and maturity on September 30, 2019.
- Cash flow: Operating cash flow was $28.2 million. Accounts receivable increased $22.1 million and inventories increased $7.4 million, partly offset by higher payables and accrued liabilities. Investing activities used $96.4 million, largely reflecting investment purchases; financing activities provided $30.4 million, primarily from stock-option exercises.
Material Changes Versus the Prior Year
- DNAG growth was driven by commercial genomics sales, which increased to $61.6 million from $20.8 million, largely on higher orders from a large consumer-genomics customer. In November 2017, the company signed a multi-year, $144 million Oragene supply agreement with that customer.
- OraQuick HCV revenue increased 81% to $25.4 million. International HCV sales benefited from a foreign-government testing program; the government later chose a laboratory-based solution and did not renew the agreement. The company reported $11.8 million of revenue under the contract in 2017 and said remaining purchases under the existing contract were uncertain.
- Domestic professional OraQuick HIV sales fell 21% to $17.0 million, attributed to competition, pricing, and CDC guidance favoring fourth-generation laboratory immunoassays. International HIV sales rose 115% to $11.3 million, supported in part by self-testing programs.
- Other revenue fell to $5.1 million from $21.3 million, principally because the AbbVie HCV co-promotion agreement ended in 2016; 2016 included $18.9 million of exclusivity revenue. FY 2017 other revenue included $4.4 million of BARDA funding and $0.7 million of Gates Foundation cost reimbursement.
- Research and development expense increased to $13.4 million from $9.8 million, with work focused on Ebola and Zika tests, molecular collection products, Intercept i2 and existing products.
Outlook, Risks and Unusual Items
- Outlook: The filing provides no quantified revenue or earnings guidance. Management stated that available cash, investments and borrowing capacity were expected to fund current operating and capital needs for the foreseeable future. Future results remain dependent on customer demand, product development, regulatory outcomes and funding.
- Customer and contract concentration: One customer represented approximately 25% of 2017 consolidated revenue and 37% of year-end accounts receivable. The large genomics customer’s order growth and the uncertain HCV government contract create meaningful variability in future sales.
- Regulatory and supply risks: Products are subject to FDA and international approvals and ongoing compliance requirements. Several products or critical components rely on sole-source suppliers or third-party manufacturers. DNAG’s FDA warning letter was cleared in August 2017, and ORAcollect received 510(k) clearance in 2016.
- Other risks: The filing highlights intense competition and pricing pressure, reliance on government and public-health funding, foreign-exchange exposure, and dependence on distributors and strategic partners. A 10% unfavorable Canadian-dollar exchange-rate movement was estimated to reduce 2017 comprehensive income by $8.2 million.
- Taxes and leadership: FY 2017 income tax expense was $10.1 million, versus $0.6 million in 2016; the reported effective tax rate was 24.6%. The Tax Cuts and Jobs Act accounting was provisional at year-end. CEO and CFO/COO retirements were announced; related 2018 charges were estimated at $8.6 million.
- Contingencies and controls: Management said ordinary-course legal matters were not expected to have a material adverse effect. Management and KPMG concluded internal control over financial reporting was effective; KPMG issued an unqualified opinion on the financial statements.
Most Important Facts for Investors to Verify
- Whether the $144 million genomics supply agreement translates into sustained orders and revenue, and how much the largest customer contributes to sales and receivables.
- Whether the foreign-government HCV customer fulfills any remaining commitments and how the loss of renewal affects 2018 revenue and margins.
- Whether DNAG’s rapid growth can continue while gross margin has declined, and whether consolidated margins recover after the loss of AbbVie exclusivity revenue.
- The cash-flow and working-capital implications of higher receivables and inventory, and the accessibility of Canadian cash given potential repatriation taxes.
- Final Tax Act accounting, actual 2018 leadership-transition charges, and progress on regulatory approvals and commercialization of Ebola, Zika and other products.