OraSure Technologies, Inc. — Q2 2015 Form 10-Q
Business context and period: OraSure develops and sells diagnostic tests, specimen-collection products and cryosurgical devices. Its two segments are OSUR (diagnostics and medical devices) and DNAG (molecular collection systems). This unaudited report covers the quarter and six months ended June 30, 2015; financial statement amounts below are in millions of dollars unless noted.
Financial results and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $30.4 | $26.4 | $57.5 | $49.9 |
| Gross profit / margin | $20.7 / 68% | $16.0 / 61% | $37.7 / 66% | $29.9 / 60% |
| Operating income (loss) | $2.7 | $2.5 | $2.4 | ($3.1) |
| Net income (loss) | $2.0 | $2.5 | $2.1 | ($3.1) |
| Diluted EPS | $0.03 | $0.04 | $0.04 | ($0.06) |
- Revenue composition: Q2 product revenue rose 3% to $26.3 million; other revenue was $4.1 million, including $3.4 million from AbbVie HCV co-promotion rights and $714,000 from BARDA Ebola-test work. For the first half, product revenue rose 2% to $50.1 million and other revenue was $7.4 million.
- Segment trends: Q2 DNAG revenue increased 65% to $8.1 million, with operating income of $2.0 million. OSUR product revenue fell 12% to $18.2 million, while its total segment revenue, including other revenue, increased 4% to $22.3 million; OSUR operating income was $685,000. First-half DNAG revenue grew 39% to $14.8 million, while OSUR total segment revenue increased 9% to $42.7 million.
- Cash flow: Cash used in operating activities was $3.4 million in the first half, versus $10.4 million used in the prior-year period. Investing activities used $4.1 million and financing activities used $759,000. Cash declined $9.5 million to $83.4 million; short-term investments were $8.0 million.
- Liquidity and debt: Cash plus short-term investments totaled $91.4 million at June 30, versus $97.9 million at year-end 2014. Working capital was $109.7 million, up from $104.8 million. The balance sheet does not report interest-bearing debt. Management expects available cash to cover current operating and capital needs for at least the next 12 months.
Material changes versus comparable periods
- First-half revenue increased 15%, and the company moved from a $3.1 million operating loss to $2.4 million operating income and from a $3.1 million net loss to $2.1 million net income.
- Growth was supported by DNAG, domestic HCV testing, substance-abuse testing and $7.4 million of first-half other revenue, mainly AbbVie co-promotion revenue and BARDA funding. Those other revenues contributed an estimated 500 basis points to first-half gross margin.
- Offsetting product weakness included a 38% first-half decline in cryosurgical revenue, lower professional HIV sales, and lower in-home HIV sales. Management linked professional HIV weakness to customers moving to laboratory-based fourth-generation assays under CDC guidance; cryosurgery faced competition, distributor consolidation and weak distributor orders.
- First-half 2014 results included a $5.5 million gain from termination of a Roche drug-assay collaboration. First-half 2015 did not include that gain; 2015’s improvement instead reflected increased other revenue and reduced royalty and in-home HIV advertising costs.
- Cash and investments fell by $6.5 million from year-end. Operating cash use included a $6.3 million reduction in deferred revenue, largely as AbbVie-related deferred revenue was recognized.
Outlook, risks and unusual items
- OraSure completed a prototype rapid Ebola test and had received $760,000 from initial CDC sales for investigational use during the first half. A June BARDA contract provides up to $10.4 million over three years, with $1.8 million initially committed and up to $8.6 million subject to options. The FDA issued an Emergency Use Authorization in late July 2015; the filing emphasizes that this is not FDA clearance or approval and is limited to the declared emergency conditions.
- The AbbVie HCV agreement runs through 2019 and provides for up to $75 million in aggregate payments, recognized ratably; performance-based milestone payments may also be available, but management said achievement of the first milestone for 2015 was unlikely. HCV growth remains subject to funding, awareness, reimbursement, competing tests and treatment-market dynamics.
- Management expects professional HIV sales to remain pressured by CDC testing guidance, funding changes and price competition. International HIV and HCV orders can be irregular and depend partly on government or donor funding. Cryosurgery remains exposed to lower-priced competition and distributor conditions.
- Other identified risks include reliance on sole-source suppliers and third-party manufacturers, regulatory and product-development uncertainty, foreign-currency exposure, and the ability of DNAG to sustain growth. Sales denominated in foreign currency were 5.8% of first-half revenue; the company had no currency hedges.
- DNAG filed patent and related claims against Ancestry.com DNA in May 2015 and against Spectrum entities in July 2015, seeking injunctive relief and damages. Management said ordinary-course legal matters were not expected to have a material adverse effect; outcomes of the named patent disputes are unresolved.
- No formal revenue or earnings guidance is provided. Management cautions that interim results are not necessarily indicative of full-year results. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether recurring product demand and profitability can support results as AbbVie and BARDA-related revenue is recognized or changes.
- Whether DNAG’s rapid growth continues and whether OSUR’s HIV and cryosurgery declines stabilize.
- Actual cash generation and liquidity needs, including the timing of deferred-revenue recognition and planned spending.
- Progress on BARDA options, Ebola regulatory status and sustainable purchase commitments; and performance under the AbbVie agreement and any milestone qualification.
- Developments and potential financial effects of the DNAG patent litigation, supplier concentration and other disclosed operational risks.