OraSure Technologies, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing, not a standalone fourth-quarter report. OraSure develops and sells diagnostic tests, specimen-collection products, molecular collection systems through DNA Genotek (DNAG), and cryosurgical products. Its two reporting segments are OSUR and DNAG.
Financial performance and position
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net revenue | $128.2 million | $119.7 million |
| Product revenue | $106.9 million | $104.5 million |
| Gross profit / gross margin | $88.0 million / 69% | $80.3 million / 67% |
| Operating income | $20.3 million | $8.1 million |
| Net income | $19.7 million | $8.2 million |
| Diluted earnings per share | $0.35 | $0.14 |
| Cash provided by operating activities | $22.8 million | $15.8 million |
| Cash, cash equivalents and short-term investments | $120.95 million | $101.32 million |
| Working capital | $139.1 million | $111.5 million |
FY 2016 operating margin was approximately 15.8% and net margin approximately 15.4%, calculated from reported figures. At year-end, total assets were $207.9 million and stockholders’ equity was $185.9 million. The company reported no borrowings under its new revolving credit facility at year-end; the facility provides up to $10 million initially, subject to borrowing-base limits and covenants. Management said available cash and borrowing capacity should cover foreseeable operating and capital needs. Planned 2017 capital expenditures were approximately $5.8 million.
In fourth-quarter 2016, revenue was $35.5 million, operating income $7.1 million, net income $7.2 million, and diluted EPS $0.13. The filing notes that second-half 2016 revenue included accelerated recognition of $5.4 million in AbbVie exclusivity payments.
Material changes and drivers
- Revenue increased 7% year over year, but product revenue grew only 2%. Other revenue rose 39% to $21.3 million, including $18.9 million of AbbVie exclusivity revenue and $2.3 million of BARDA funding.
- AbbVie and OraSure agreed to end their HCV co-promotion agreement effective December 31, 2016. The termination accelerated recognition of remaining deferred exclusivity payments; AbbVie has no further financial obligations, while OraSure is no longer paying for detailing and may seek other promotional arrangements.
- OSUR segment revenue was $96.0 million, up 7%, and operating income was $15.6 million. DNAG revenue was $32.2 million, up 8%, and operating income was $4.7 million. DNAG gross margin declined to 67% from 70%, while OSUR gross margin rose to 69% from 66%.
- OraQuick HIV revenue declined 4% to $33.1 million. Domestic professional HIV sales fell 14%, partly because of migration to laboratory-based fourth-generation assays recommended by CDC guidelines; domestic OTC sales fell 10%. International HIV sales increased 118%.
- OraQuick HCV revenue grew 24% to $14.1 million, led by a 71% increase in international sales. Cryosurgical revenue rose 11% to $13.2 million, and DNAG molecular collection revenue grew 8%.
- Operating cash flow rose to $22.8 million. Cash use included $8.1 million in investing activities and $1.2 million in financing activities; financing included $3.4 million in share repurchases, partly offset by $2.7 million of option exercise proceeds.
Outlook, risks and unusual items
- The filing provides no formal consolidated revenue or earnings guidance. Management expected BARDA-related revenue to increase in 2017 as work continued on Ebola and Zika programs. BARDA awards provide up to $10.4 million for Ebola and up to $16.6 million for Zika, with portions dependent on options, funding and performance.
- An $18 million foreign-government supply contract for OraQuick HCV and HIV tests calls for deliveries from 2016 through late 2017. OraSure recognized $1.9 million of product revenue on it in 2016; the contract includes an option for an additional purchase of up to the original quantities.
- In February 2017, DNAG settled patent litigation with Ancestry and Spectrum. Ancestry paid $12.5 million, to be recorded in 2017 as a separate reduction of operating expenses; DNAG granted Ancestry a limited royalty-bearing license. The settlement was not included in FY 2016 results.
- DNAG’s FDA warning letter remained pending at year-end, although FDA cleared its ORAcollect device in April 2016. Management expected no material near-term impact, but continued regulatory compliance is a risk.
- Other key risks include declining U.S. professional HIV demand, dependence on government funding and large international orders, intense price and product competition, regulatory approval uncertainty, reliance on sole-source suppliers and third-party manufacturers, and foreign-exchange exposure from DNAG’s Canadian operations. One customer represented approximately 15% of 2016 consolidated revenue and 15% of year-end accounts receivable.
- The company reported a full valuation allowance against U.S. deferred tax assets and an accumulated deficit of $150.5 million, despite net income in 2015 and 2016. It cautions that sustained profitability is not assured.
- The Ancestry settlement aside, management said ordinary-course legal matters were not expected to materially affect financial position or results. The company reported effective disclosure controls and internal control over financial reporting; KPMG issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much FY 2016 earnings growth reflects recurring product and service economics versus AbbVie’s accelerated $5.4 million recognition, BARDA funding, and the $1.4 million supplier-claim recovery that reduced R&D expense.
- Whether OraQuick HCV international demand, including the foreign-government program, continues and converts into cash on schedule; verify the optional follow-on order separately from committed purchases.
- Whether DNAG sustains growth and margins while the FDA warning letter remains pending, and how the 2017 Ancestry settlement and license affect reported results and competitive positioning.
- Whether declining domestic professional HIV sales can be offset by international HIV, HCV and molecular-collection growth, given CDC testing recommendations, funding constraints and price competition.
- Liquidity composition and availability: confirm restricted cash, short-term investments, revolver borrowing-base availability, covenant requirements and planned capital spending.