OraSure Technologies, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited consolidated results; amounts below are in millions of dollars unless stated otherwise. OraSure develops and sells diagnostic tests and specimen-collection products, including HIV and HCV tests, molecular collection systems, and cryosurgical products.
Financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $26.4 | $24.3 | $49.9 | $45.5 |
| Gross profit | $16.0 | $14.5 | $29.9 | $26.5 |
| Gross margin | 61% | 60% | 60% | 58% |
| Operating income (loss) | $2.5 | $(5.6) | $(3.1) | $(16.2) |
| Net income (loss) | $2.5 | $(5.3) | $(3.1) | $(15.5) |
| Diluted earnings (loss) per share | $0.04 | $(0.10) | $(0.06) | $(0.28) |
| Operating cash flow | Not separately stated | Not separately stated | $(10.4) | $(9.3) |
Q2 revenue rose 8%; first-half revenue rose 10%. First-half product revenue increased 9%, while licensing and product-development revenue was $0.8 million, up from $0.5 million. First-half results remained loss-making despite improved revenue and lower expenses.
Liquidity and balance sheet
- At June 30, cash was $75.8 million and short-term investments were $4.4 million, totaling $80.3 million, compared with $93.2 million in cash at December 31, 2013.
- Working capital was $101.1 million, versus $100.6 million at year-end. Current assets were $115.8 million and current liabilities $14.7 million.
- Total assets were $179.6 million; stockholders’ equity was $160.3 million. The balance sheet lists no borrowings; the filing text does not provide a separate debt metric.
- Cash declined $17.4 million in the first half. Investing activities used $6.4 million, including $2.0 million for property and equipment and $4.4 million for short-term investments. Financing activities used $0.4 million.
Management stated that current cash was expected to fund operating and capital needs for at least the next 12 months, while noting that requirements could vary with acquisitions, research and development, regulatory work, litigation, and other factors.
Material changes and operating drivers
- Q2 and first-half operating results included a $5.5 million reduction in operating expense from the Roche collaboration termination. OraSure recorded the amount as a receivable in Q2; Roche paid it in July 2014. The improvement in Q2 operating results therefore includes this unusual benefit.
- OraSure’s June 2014 agreement with AbbVie provides for up to $75 million in payments through December 31, 2019 for exclusive promotion rights and related services. The company recognized $0.8 million in revenue through June 30; the first $15 million payment was received in July. Further annual payments of $3.5 million to $55.5 million are contingent on performance milestones beginning in 2015.
- HCV test revenue grew strongly: first-half OraQuick HCV revenue increased 134% to $3.8 million. Management cited new customers and expanded testing programs, but said public-health funding constraints and the effort needed to build market demand could limit growth. A large international customer’s purchases were expected to be lower over the rest of the year.
- DNAG molecular collection revenue rose 24% to $10.7 million in the first half, primarily reflecting customer order timing and stronger academic-market sales. DNAG reported first-half operating income of $1.1 million, versus a $0.7 million loss in 2013.
- First-half cryosurgical revenue increased 22% to $8.9 million, while domestic professional HIV revenue fell 9% to $14.3 million. Management attributed domestic professional HIV weakness partly to migration to automated laboratory tests under CDC guidance and changes in customer ordering.
- Sales and marketing expense fell, in part because the company reduced broad-based advertising for its OTC HIV test. The filing says consumer purchases of that test were down 1% in Q2 but up 9% in the first half, based on available point-of-sale data.
Outlook, risks, and other disclosures
The filing provides no quantified company-wide revenue or earnings guidance. Management expected HCV collaboration efforts to support product sales, but noted uncertainty around HCV testing funding and demand. It also expected domestic professional HIV sales to remain under pressure from testing-guideline changes and reduced government funding.
- OraQuick In-Home HIV revenue recognition changed in December 2013: revenue is now recognized on shipment to retailers or distributors, based on an estimate of returns. Accordingly, reported 2014 and 2013 revenue for this product is not directly comparable. The June 30 reserve for returns and allowances was $0.36 million.
- Risks include reliance on sole-source suppliers and third-party manufacturing, regulatory approval and compliance, product acceptance and competition, public funding reductions, customer and distributor ordering patterns, international sales variability, and foreign-exchange exposure. The filing reported no material change to the risk factors in the 2013 Form 10-K.
- OraSure noted the end of a supply agreement for Histofreezer and the former supplier’s stated plan to sell a competing product. A UK distributor had also discontinued purchases of Intercept products while selling a competing device.
- Management reported no significant changes to contractual obligations or off-balance-sheet arrangements. Disclosure controls were assessed as adequate and effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of Q2 operating profitability depended on the one-time $5.5 million Roche settlement, and how results perform without it.
- Whether AbbVie’s $75 million maximum payments, the July $15 million receipt, and future milestone payments are achieved and recognized as expected.
- Whether HCV growth can persist after the unusually large international customer’s purchases decline, given public-funding and demand constraints.
- How the shipment-based accounting change and estimated returns affect OraQuick In-Home HIV sales comparisons and future reserves.
- Whether cash use, supplier concentration, and the stated 12-month liquidity expectation remain consistent with operating needs and plans.