OraSure Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where noted.
Business context
OraSure develops and sells diagnostic tests and specimen-collection products through its OSUR segment, and genetic and molecular specimen-collection products and microbiome services through its DNAG segment. In January 2019, it acquired CoreBiome and Novosanis, which are included in DNAG. In August, it sold its cryosurgical systems business.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $36.0 million | $45.9 million | $104.9 million | $131.5 million |
| Gross profit | $21.6 million | $28.5 million | $64.7 million | $78.9 million |
| Gross margin | 60% | 62% | 62% | 60% |
| Operating income | $13.1 million | $10.9 million | $14.5 million | $15.9 million |
| Net income | $13.1 million | $8.1 million | $14.2 million | $10.1 million |
| Diluted EPS | $0.21 | $0.13 | $0.23 | $0.16 |
| Operating cash flow | Not separately reported | Not separately reported | $10.8 million | $24.8 million |
At September 30, cash and cash equivalents were $85.5 million and available-for-sale securities were $115.8 million, totaling about $201.2 million. Working capital was $194.3 million. Total liabilities were $37.9 million, including $5.1 million of lease liabilities and $3.4 million of acquisition-related contingent consideration. The company reported no borrowings outstanding when it terminated its credit agreement in March 2019. Stockholders’ equity was $301.4 million.
Material changes versus the prior comparable periods
- Revenue fell 22% in Q3 and 20% for the nine months. Management attributed the decline mainly to lower genomics demand, including changed purchasing patterns at a large consumer-genomics customer, and weaker OraQuick HIV sales. Nine-month genomics revenue fell 35%.
- Microbiome revenue grew 81% in Q3 and 75% for the nine months, partly reflecting CoreBiome laboratory services. OraQuick HCV revenue also increased for the nine-month period.
- Net income increased despite lower revenue, but 2019 results included a $10.1 million pre-tax gain on the cryosurgical business sale and income from a lower estimated acquisition-contingent-consideration liability. The company said these items, net of acquisition costs, increased nine-month EPS by approximately $0.16.
- 2018 results included $8.6 million of executive-transition costs, which did not recur in 2019. Nine-month operating cash flow declined from $24.8 million to $10.8 million.
- Allowance for doubtful accounts rose to $2.5 million from $0.4 million at year-end 2018. The filing links increased DNAG bad-debt expense primarily to a receivable from a large Chinese genomics customer.
Outlook, management commentary, risks and unusual items
- Management said existing cash and investments should fund current and foreseeable operating and capital needs; the filing provides no numerical revenue or earnings guidance.
- On November 8, 2019, OraSure acquired microbiome-services provider Diversigen for an initial purchase price of $12.0 million, subject to adjustments, plus a contingent payment tied to 2019 performance.
- CoreBiome and Novosanis agreements may require up to $32.4 million of contingent consideration over three years; management agreed in October to settle one 2019-related amount for $3.5 million, expected to increase the related liability by about $0.5 million in Q4.
- One customer represented 24% of accounts receivable at September 30 and 17% of nine-month revenue. The filing also cites reliance on sole-source suppliers and third-party manufacturing as potential supply risks.
- OraSure and Ancestry.comDNA are in arbitration over whether potential future Ancestry products are covered by a royalty-bearing patent license. The proceeding was expected to conclude in early 2020; future royalties are uncertain.
- About $83.5 million, or 42%, of cash, cash equivalents and securities was held by the Canadian subsidiary; repatriating amounts above certain levels could have adverse tax consequences. A 10% unfavorable currency move was estimated to reduce nine-month comprehensive income by approximately $11.2 million.
- The company reported that disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter. Management said ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether genomics demand and the large customer’s purchasing patterns recover, and whether the associated receivable is collected.
- Underlying operating performance excluding the cryosurgical-sale gain and contingent-consideration fair-value changes.
- Progress and economics of integrating CoreBiome and Novosanis, the potential contingent payments, and the Diversigen acquisition.
- OraQuick HIV sales trends, including the effects of competition, program timing and changes in customer orders.
- Outcome of the Ancestry arbitration and any effect on future royalty revenue.
- Cash generation relative to reported net income, and potential tax consequences of accessing Canadian-held funds.