OraSure Technologies, Inc. — Q2 2012 Form 10-Q
Business context and period. This unaudited report covers the three and six months ended June 30, 2012. OraSure develops and sells oral-fluid diagnostic tests and specimen-collection products, cryosurgical devices, and—following its August 2011 acquisition of DNA Genotek (DNAG)—molecular collection systems. Comparisons with 2011 are affected by DNAG not being included in reported results until after its acquisition.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $22.6 million | $19.1 million | $43.6 million | $36.5 million |
| Gross profit / margin | $14.7 million / 65% | $12.3 million / 64% | $28.4 million / 65% | $23.5 million / 64% |
| Operating loss | $3.5 million | $2.4 million | $7.2 million | $4.9 million |
| Net loss | $3.6 million | $2.4 million | $6.8 million | $5.0 million |
| Loss per share | $0.07 | $0.05 | $0.14 | $0.11 |
- Q2 revenue rose 19%; the quarter included $3.3 million from DNAG. OraSure segment revenue was nearly flat, up 1% to $19.3 million. First-half revenue also rose 19%, including $6.6 million from DNAG.
- For the first half, operating cash outflow was $2.3 million, versus $0.4 million in 2011. Capital expenditures were $0.7 million. Cash declined $0.6 million to $23.3 million from year-end 2011.
- At June 30, cash was $23.3 million, working capital $31.5 million, and current liabilities $20.8 million. Debt was $7.0 million, all current; the company repaid the outstanding balance on July 30 and could no longer borrow under the facility.
- On July 11, the company sold 6.1 million shares at $12.30 per share, raising $75.0 million before expenses and approximately $70.2 million net. Management expected cash plus offering proceeds to fund current operating and capital needs for at least 12 months.
Material changes and management commentary
- Q2 operating loss widened mainly because sales and marketing and general and administrative expenses increased, partly offset by lower research and development expense. Sales and marketing spending rose in preparation for the in-home HIV test launch; R&D fell as related clinical-trial costs declined.
- OraQuick revenue declined 8% in Q2: domestic HIV sales fell 16%, reflecting public-health program changes, reduced government funding, price competition, and purchase timing. HCV sales increased following the product’s 2011 CLIA waiver.
- Cryosurgical revenue rose 61% in Q2, driven by OTC sales to Latin American and European distributors. Substance-abuse testing revenue fell 9% in Q2 and 20% in the first half; a major laboratory distributor was expected to stop buying Intercept during 2012.
- First-half licensing and product-development revenue increased 104%, including a $1.0 million Merck milestone payment. Certain cryosurgical royalty payments are expected to end when patents expire in August 2013.
- Q2 foreign-currency translation reduced other comprehensive income by $0.9 million; first-half translation adjustment was positive $0.2 million. The filing reports no material impact from exchange rates on operating results.
Outlook, risks, and contingencies
- The FDA approved the OraQuick In-Home HIV Test on July 3, 2012. The company expected launch in October, targeting more than 30,000 retail outlets and 85% all-commodity-volume coverage at initial placement. Management estimated a U.S. annual retail market opportunity of about $500 million. The filing gives no earnings or revenue guidance.
- Management planned to build launch inventory and increase sales and marketing spending. Initially, revenue would be recognized only when the product is sold to retail customers, because the company lacked a returns history.
- Commercialization risks include consumer adoption, retail and supplier relationships, adequate inventory, product performance and publicity, customer-support execution, pricing, competition, and potential intellectual-property claims. The filing cites test sensitivity of 92% and specificity of 99.98% in clinical trials.
- Other stated risks include reliance on distributors and sole-source suppliers, government funding dependence, intensifying competition, integration of DNAG, regulatory requirements, foreign-exchange exposure, and the company’s history of losses. OraSure maintained a full valuation allowance against its U.S. net deferred tax asset; the reported tax benefit related to DNAG in Canada.
- Management said ordinary-course legal matters were not expected to materially affect financial position or results. No material changes to contractual obligations or off-balance-sheet arrangements were reported. Controls and procedures were assessed as adequate and effective; DNAG financial-control integration was ongoing.
Most important facts for investors to verify
- Whether the In-Home HIV Test launched as planned, achieved expected retail distribution and sell-through, and generated returns or support costs materially different from assumptions.
- Post-offering cash, operating cash burn, and the financial effect of repaying the $7.0 million credit-facility balance.
- Whether declines in domestic HIV testing and Intercept sales continued, including the impact of the distributor’s expected exit and government funding levels.
- Whether growth in DNAG and cryosurgical products offset pressure in established diagnostic markets, and whether Reckitt Benckiser’s distribution agreement was renewed on acceptable terms.
- Future margins and expenses as launch marketing increases, and the timing and durability of the Merck milestone and other licensing revenue.