OraSure Technologies, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This annual filing includes unaudited fourth-quarter results. OraSure develops and sells oral-fluid diagnostic tests and collection devices, other diagnostic products, cryosurgical devices, and—following its August 17, 2011 acquisition of DNA Genotek (DNAG)—molecular sample-collection products.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $81.9 million | $75.0 million |
| Gross profit / gross margin | $51.7 million / 63% | $47.4 million / 63% |
| Operating loss | $9.4 million | $3.4 million |
| Net loss / diluted loss per share | $8.8 million / $0.19 | $3.5 million / $0.08 |
| Cash from operating activities | $(3.0) million | $3.9 million |
| Cash, cash equivalents and short-term investments at year-end | $23.9 million | $75.7 million |
| Working capital at year-end | $30.9 million | $77.8 million |
| Debt at year-end | $7.3 million current | $7.8 million current |
Revenue rose 9%, including $6.2 million from DNAG after acquisition; excluding DNAG, OraSure product revenue grew 5%. Product revenue was $80.7 million, while licensing and product-development revenue fell 69% to $1.2 million. The operating loss widened as research and development and general and administrative costs increased. The filing identifies $7.9 million of HIV OTC clinical-trial spending, $2.6 million of DNAG acquisition transaction costs, and $2.1 million of DNAG-related amortization and purchase-accounting charges among notable contributors to the loss.
Cash used in investing activities was $50.3 million, including $49.7 million paid for DNAG net of cash acquired; management also cites $52.3 million of cash used for the acquisition and related transaction expenses. The cash decline was primarily acquisition-related. The Comerica facility carried a fixed 4.15% rate; $7.3 million of principal was due in 2012, with the remaining balance payable May 27, 2012. There were no available borrowings at year-end, and OraSure was negotiating a refinancing. The company reported compliance with its loan covenants and expected available cash to fund operations and capital needs for at least 12 months.
Fourth quarter
Unaudited Q4 2011 revenue was $23.7 million, versus $18.8 million in Q4 2010. Operating loss was $0.3 million, compared with $0.9 million in the prior-year quarter. Q4 2011 net income was $0.1 million, versus a $1.0 million net loss; the 2011 quarter included a $0.6 million income-tax benefit.
Material changes and business developments
- OraQuick revenue increased 8% to $43.3 million. Domestic HIV sales were nearly flat at $38.7 million; international HIV sales grew 67% to $3.0 million. HCV sales reached $1.6 million from $0.2 million.
- OraQuick HCV received a CLIA waiver in November 2011, expanding potential use in clinics and physician offices. The oral-fluid FDA claim remained pending further discussions with the FDA.
- OraSure completed final clinical testing and filed all three modules of its FDA application for an over-the-counter HIV test. FDA approval had not been received by year-end.
- DNAG contributed $6.2 million of post-acquisition revenue and a $0.7 million net loss, including an $0.9 million inventory fair-value step-up charge. The acquisition added $24.7 million of goodwill and $30.4 million of net intangible assets at year-end.
- Substance-abuse testing revenue rose 7% to $12.5 million, but OraSure expected to lose a major Intercept distributor that generated $3.5 million of 2011 sales.
- Cryosurgical revenue was nearly flat at $12.0 million: professional domestic sales improved, while OTC sales declined 16%, mainly due to lower purchases by Latin American distributor Genomma.
- Insurance risk-assessment revenue declined 10% to $5.2 million, reflecting market softness, order timing, and some customers’ adoption of simplified-issue policies.
Outlook, risks and contingencies
Management expected OraSure research and development expense to decrease in 2012, sales and marketing expense to increase in preparation for a possible HIV OTC launch, and general and administrative expense to remain approximately flat. Planned 2012 capital expenditures were about $4.2 million. Management expected a further $1.0 million Merck milestone payment in 2012. These are expectations, not formal revenue or earnings guidance; OTC launch timing and commercial success depended on FDA approval and other factors.
- Regulatory and commercialization: FDA approval of the HIV OTC test was uncertain; HCV oral-fluid approval was on hold. Changes or delays in approvals could raise costs or limit sales.
- Competition and customers: The filing warns of price pressure, competing diagnostic products, adoption barriers, and reduced public-health or research funding. The expected loss of a significant Intercept distributor is a specific near-term exposure.
- Supply and distribution: Certain critical components and products rely on sole-source or third-party suppliers. Distributor performance and the continuity of supply could affect sales and production.
- Acquisition and controls: DNAG integration, expected benefits, foreign-currency exposure, and valuation of acquired goodwill and intangibles are risks. Management’s year-end internal-control assessment excluded DNAG; the company expected to assess DNAG controls within one year of acquisition. KPMG’s unqualified internal-control opinion likewise excluded DNAG.
- Debt and liquidity: The Comerica debt maturity in 2012 made refinancing an important near-term consideration. The filing reported no off-balance-sheet arrangements.
- Legal matter: OraSure’s UK patent-infringement case concerning a competing cryosurgical product was scheduled for trial in late April 2012. Defendants denied infringement and challenged patent validity. Management said ordinary-course legal matters were not expected to materially affect financial position or results.
- Other risks: OraSure reported annual net losses since 2008 and an accumulated deficit of $147.4 million. It maintained a full valuation allowance against U.S. net deferred tax assets and reported $2.0 million of gross unrecognized tax benefits. No cash dividends were anticipated.
Important facts for investors to verify
- Whether and when the FDA approves the OraQuick HIV OTC test, and the associated launch costs, distribution arrangements, demand, and sales.
- Whether HCV CLIA-waiver expansion and Merck’s physician-office promotion produce meaningful sales growth, and the status of the oral-fluid claim.
- The timing and terms of Comerica refinancing or repayment of the $7.3 million debt due in 2012.
- The financial impact of losing the Intercept distributor, including whether Roche-developed assays offset the expected $3.5 million sales exposure.
- DNAG’s post-acquisition growth, margins, integration progress, and internal-control assessment; also monitor acquired goodwill and intangible-asset valuation.
- Cash use, operating cash flow, and liquidity against management’s stated 12-month funding expectation and planned $4.2 million capital expenditures.
- Outcome of the UK cryosurgical patent litigation and any material change in contingencies or required royalty payments.