OraSure Technologies, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited consolidated results include DNA Genotek (DNAG) from its August 17, 2011 acquisition date.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $21.7 million | $19.0 million | $58.2 million | $56.2 million |
| Gross profit / margin | $13.6 million / 63% | $11.8 million / 62% | $37.1 million / 64% | $35.4 million / 63% |
| Operating income (loss) | $(4.2) million | $0.3 million | $(9.1) million | $(2.4) million |
| Net income (loss) | $(3.9) million | $0.3 million | $(9.0) million | $(2.5) million |
| Basic and diluted EPS | $(0.08) | $0.01 | $(0.19) | $(0.05) |
| Operating cash flow | Not separately stated | Not separately stated | $(4.1) million | $0.2 million |
- Q3 revenue rose 14%, including $2.0 million from DNAG; excluding DNAG, product revenue increased 6%. Nine-month revenue rose 4%; excluding DNAG, product revenue increased 5%.
- Nine-month licensing and product-development revenue fell 71% to $1.0 million, mainly because the prior-year period included $2.0 million of Merck HCV-development milestone payments.
- Q3 R&D increased 84% to $5.5 million, principally from HIV OTC clinical-trial costs and DNAG expenses. G&A rose 66% to $6.5 million, including $2.1 million of DNAG acquisition transaction costs. Nine-month R&D rose 65%; G&A rose 18%, including $2.5 million of transaction costs.
- At September 30, cash and cash equivalents were $21.4 million, versus $73.8 million at December 31, 2010; short-term investments were nil versus $1.9 million. Working capital was $27.1 million versus $77.8 million. The cash decline primarily reflects approximately $50.0 million paid for DNAG, net of acquired cash, and related transaction costs.
- Cash used in investing activities was $49.9 million for the nine months, chiefly for the acquisition. Total assets were $122.8 million; stockholders’ equity was $96.0 million. Current liabilities included $7.4 million of current debt.
- The company had a $10 million Comerica credit facility, with a November 27, 2011 maturity; no borrowing availability remained at September 30. The facility was secured by company assets and facilities. OraSure reported compliance with its covenants at quarter-end and was evaluating options for the facility’s expiration.
Material changes, outlook and risks
- OraSure acquired all of DNAG for approximately $50.7 million, funded with cash. Preliminary purchase accounting recorded $26.9 million of identifiable intangible assets and $27.5 million of goodwill. The valuation was not final. DNAG contributed $2.0 million of revenue and a reported $0.8 million net loss after acquisition, including a $0.8 million non-cash inventory step-up charge.
- Management said existing cash was expected to fund operating and capital needs for at least the next 12 months. No specific revenue or earnings guidance was provided. Management expected higher HIV OTC test commercialization expenses in Q4 2011 and a significant increase in 2012.
- The OraQuick HCV CLIA-waiver application remained under FDA review; the company had submitted requested reproducibility-study results. For the OraQuick HIV OTC test, final clinical testing was complete and filing was planned in modules, with the second expected by the end of November and the final module near year-end 2011.
- Q.E.D. production was temporarily disrupted in Q3, reducing sales; production resumed in October and the company was filling a small backlog. The Reckitt Benckiser cryosurgical OTC distribution agreement was due for renewal at year-end, with negotiations ongoing.
- Key risks include FDA clearance or review delays, DNAG integration and realization of acquisition benefits, competition and pricing pressure, dependence on distributors and sole-source or third-party suppliers, government or research-funding reductions, foreign-currency exposure from DNAG, and refinancing the expiring credit facility. The filing also notes that DNAG’s financial reporting controls had not yet been integrated or assessed; management expected to complete its assessment within one year of acquisition.
- Management reported no legal matters expected to have a material adverse effect. It also stated that no significant changes to previously disclosed contractual obligations or off-balance-sheet arrangements had occurred.
Important facts for investors to verify
- Whether OraSure extended, replaced or repaid the Comerica facility after its November 27, 2011 maturity, and whether covenant or liquidity terms changed.
- Final DNAG purchase-price allocation, including the values and useful lives of acquired intangibles, goodwill, and any subsequent impairment or purchase-accounting adjustments.
- FDA decisions and timing for the OraQuick HCV waiver and HIV OTC applications, and the commercial launch costs and demand assumptions for the OTC test.
- Whether Q.E.D. production normalized, the Reckitt Benckiser contract was renewed, and distributor ordering or government funding affected sales.
- Subsequent operating cash use and cash balance, given the acquisition-driven decline in liquidity and continuing losses.