OraSure Technologies, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless otherwise stated. Amounts are in U.S. dollars. Financial statement amounts are in thousands unless noted.
Business context
OraSure develops and sells diagnostic tests, oral-fluid specimen collection products, molecular collection systems through DNA Genotek (DNAG), and cryosurgical products. Its two reportable segments are OSUR and DNAG. The OraQuick In-Home HIV test entered U.S. retail in September 2012.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Revenue | $21.164 million | $20.944 million; up 1% |
| Product revenue | $20.962 million | $19.738 million; up 6% |
| Licensing and product development revenue | $0.202 million | $1.206 million; down 83% |
| Gross profit / gross margin | $12.029 million / 57% | $13.732 million / 66% |
| Operating loss | $10.589 million | $3.652 million |
| Net loss / loss per share | $10.226 million / $0.18 | $3.252 million / $0.07 |
| Cash used in operating activities | $7.674 million | $1.356 million |
| Cash and working capital at March 31, 2013 | $79.276 million / $94.897 million | Cash at Dec. 31, 2012: $87.888 million; working capital: $103.483 million |
Cash declined $8.612 million during the quarter. Capital expenditures were $0.480 million. The balance sheet reports no long-term debt; the cash flow statement reports no debt repayments in Q1 2013. Current liabilities were $17.989 million, against current assets of $112.886 million. The company said available cash was expected to fund current operating and capital needs for at least the next 12 months, subject to spending and business uncertainties.
OSUR revenue was $17.232 million, including $17.030 million of product revenue; DNAG revenue was $3.932 million. DNAG product revenue grew 19%, while OSUR product revenue grew 4%. OSUR operating loss widened to $10.040 million from $2.748 million; DNAG operating loss improved to $0.549 million from $0.904 million.
Material changes and management commentary
- Revenue growth came mainly from molecular collection systems and infectious-disease and substance-abuse testing. OraQuick In-Home HIV sales contributed $1.442 million of net revenue; management cited retail out-of-stocks and anti-theft placement as constraints on sales growth.
- The $1.0 million Merck HCV collaboration milestone recorded in Q1 2012 did not recur; the collaboration has since been terminated. This contributed to the sharp decline in licensing revenue.
- Advertising and promotional expense for the In-Home HIV test rose to $6.9 million from $1.0 million, contributing to sales and marketing expense growth and the larger operating loss.
- Gross margin fell to 57% from 66%. Management cited lower-margin product mix, the absent Merck milestone, higher OraQuick patent royalties, and production scrap, spoilage, and unabsorbed labor and overhead costs. The 2.3% U.S. medical-device excise tax effective January 2013 is also expected to pressure margins.
- OraQuick revenue increased 7% overall, while domestic and international HIV sales, and domestic and international HCV sales, each declined year over year. Cryosurgical revenue fell 11%, partly due to prior-period distributor purchases ahead of price increases; substance-abuse revenue rose 8%.
- Foreign-currency translation reduced comprehensive results by $1.125 million. The company reported no currency hedging contracts; foreign-currency-denominated sales were 5.7% of revenue.
Outlook, risks, contingencies, and unusual items
No numerical revenue or earnings guidance is provided. Management stated that cash should cover current operating and capital needs for at least 12 months, but cash requirements may vary with promotional spending, R&D, acquisitions, litigation, regulatory work, and market acceptance.
Key risks discussed include uncertain retail execution and consumer acceptance of the In-Home HIV test; constrained public and research funding; distributor inventory, competition, and purchase patterns; reliance on sole-source suppliers; regulatory and product-quality requirements; foreign-exchange exposure; and the company’s history of losses and ability to achieve sustained profitability. The Reckitt Benckiser distribution contract had expired and renewal terms were under negotiation. Royalties under a separate cryosurgical license were expected to end when certain patents expire in August 2013. Management said ordinary-course legal matters were not expected to materially affect financial position or results. No material changes to previously disclosed risk factors or contractual obligations were reported.
OraSure defers revenue on In-Home HIV shipments to retailers and distributors with return rights because it cannot yet reasonably estimate returns; revenue is recognized as retail sales occur. The filing reports a full valuation allowance against U.S. net deferred tax assets and a $0.410 million Canadian deferred tax benefit. Management reported no goodwill impairment indicators at March 31, 2013; the prior annual test found DNAG fair value approximately 13% above carrying value.
Important facts for investors to verify
- Whether retail availability and placement issues are resolved and In-Home HIV sell-through supports the elevated promotional investment.
- Whether gross margin recovers as production issues are addressed, and how the medical-device excise tax and patent royalties affect margins.
- Whether operating cash use moderates and the stated liquidity runway remains adequate.
- Whether DNAG growth continues and OSUR distributor, public-funding, and product-market challenges persist.
- Progress on the Reckitt Benckiser renewal, the August 2013 patent expiration and royalty implications, and any material change in litigation or supplier risks.