Business context and reporting period
OraSure Technologies, Inc. develops and sells oral-fluid diagnostic tests and specimen-collection products, including HIV and HCV tests, genetic collection devices, and cryosurgical products. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods. Amounts below are in millions of dollars except per-share data.
Financial results and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $27.8 | $24.7 | $77.8 | $70.2 |
| Gross profit / margin | $18.7 / 67% | $14.9 / 61% | $48.6 / 63% | $41.5 / 59% |
| Operating income (loss) | $0.9 | $(2.1) | $(2.2) | $(18.2) |
| Net income (loss) | $1.1 | $(1.9) | $(2.0) | $(17.4) |
| Diluted EPS | $0.02 | $(0.03) | $(0.04) | $(0.31) |
| Operating cash flow | Not separately provided | Not separately provided | $8.4 | $(3.1) |
- Q3 product revenue was essentially flat at $24.4 million; licensing and product-development revenue rose to $3.4 million from $0.1 million, largely reflecting ratable recognition of AbbVie collaboration payments.
- For the first nine months, product revenue increased 6% to $73.6 million. DNAG revenue grew 29% to $17.5 million; OSUR segment revenue increased 6% to $60.3 million, including licensing revenue.
- At September 30, cash was $93.9 million and short-term investments were $5.0 million, totaling $98.9 million, versus $93.2 million in cash at December 31, 2013. Working capital was $104.8 million. The filing reports no debt balance.
- Deferred revenue increased to $11.5 million from $1.1 million, including $10.8 million remaining from AbbVie’s $15.0 million July payment. Inventory rose to $14.8 million from $11.4 million.
- Cash from operations included a $10.4 million increase in deferred revenue. Capital expenditures were $2.4 million; investing cash outflow was $7.3 million, including net purchases of short-term investments.
Material changes versus prior period
- Profitability improved, but nine-month operating loss still included a one-time $5.5 million Roche termination payment recognized as a reduction of operating expense in Q2 2014. The nine-month comparison also benefited from lower OraQuick In-Home HIV marketing expense and higher AbbVie-related revenue.
- HIV revenue remained pressured: nine-month net OraQuick HIV revenue fell 10%, amid migration to laboratory-based fourth-generation testing under CDC guidance and lower international orders. HCV revenue increased 74% for the nine months, while DNAG growth was driven by commercial and academic demand.
- OraQuick In-Home HIV revenue periods are not directly comparable: beginning in December 2013, the company recognized revenue on shipment to retailers rather than consumer sell-through after concluding it could estimate returns. The filing states consumer purchases increased 6% in the first nine months based on available point-of-sale data.
- Q3 international professional Histofreezer revenue fell sharply amid supply transition issues, inventory shortages, and new competition; the company expected supply issues to be corrected in Q4 but anticipated continued competitive pressure.
Outlook, risks and contingencies
- No quantified revenue or earnings guidance is provided. Management expected cash to fund current operating and capital needs for at least the next 12 months.
- The company expected physician-office HCV sales to begin increasing later in 2014 and through 2015 as AbbVie co-promotion efforts developed. The agreement provides up to $75 million over its term through 2019, recognized ratably, plus potential annual performance milestones of $3.5 million to $55.5 million if specified enrollment thresholds are met.
- The I2 collection device launched in July 2014; the company expected to begin commercial launch with a Thermo Fisher NIDA-5 assay panel in Q4 2014.
- Key risks include dependence on public funding and variable international orders; CDC testing recommendations affecting professional HIV demand; execution of the AbbVie HCV collaboration; competition and supply interruptions, including sole-source components; product acceptance, regulatory matters, and the company’s history of losses. Foreign exchange translation affected comprehensive loss, though management said currency effects on revenue were not material.
- The company reported no material changes to previously disclosed risk factors, no significant changes in contractual obligations, and no off-balance-sheet arrangements. A DNAG employment claim was settled in September 2014 for an immaterial amount. Management concluded disclosure controls were effective.
Important facts for investors to verify
- How much of revenue and operating improvement is recurring versus attributable to AbbVie collaboration recognition and the $5.5 million Roche settlement.
- Whether HCV co-promotion converts into product demand and milestone payments, and whether the $15.0 million advance is recognized as revenue over the agreement term as planned.
- Trends in professional and consumer HIV sales, including the impact of CDC guidance and the changed In-Home HIV revenue-recognition method.
- Whether Histofreezer supply problems were resolved and how competition affects international sales and margins.
- Whether DNAG growth and operating performance continue, and whether operating cash generation remains positive as deferred revenue and working-capital movements normalize.