OraSure Technologies, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; unaudited. OraSure develops and sells diagnostic tests and specimen-collection devices through its OSUR and DNA Genotek (DNAG) businesses. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $42.3 | $32.3 | $115.0 | $92.7 |
| Gross profit / margin | $24.6 / 58% | $22.7 / 70% | $70.4 / 61% | $64.1 / 69% |
| Operating income | $7.3 | $6.1 | $30.1 | $13.2 |
| Net income | $5.8 | $6.2 | $23.6 | $12.5 |
| Diluted EPS | $0.09 | $0.11 | $0.39 | $0.22 |
| Operating cash flow | Not separately provided for the quarter | $30.4 | $25.2 |
- Q3 revenue rose 31%; product revenue increased 62% to $41.2 million. DNAG revenue more than doubled to $18.6 million, while OSUR product revenue grew 32% to $22.6 million. Other revenue fell to $1.2 million from $6.8 million, mainly because AbbVie co-promotion exclusivity revenue ended.
- Q3 gross margin fell to 58% from 70%, reflecting the absence of AbbVie exclusivity revenue, a higher mix of lower-margin products, and increased scrap and spoilage. Despite higher revenue, Q3 net income declined year over year.
- Nine-month revenue grew 24%; net income rose 89%. The 2017 period included a $12.5 million litigation-settlement gain, so reported operating income and earnings growth include this unusual item.
- By segment, Q3 DNAG operating income was $7.8 million versus $1.6 million; OSUR recorded an operating loss of $0.5 million versus income of $4.6 million. For nine months, DNAG operating income was $30.3 million and OSUR reported a $0.2 million operating loss.
Liquidity, cash flow and debt
- At September 30, cash, cash equivalents and restricted cash totaled $78.6 million; available-for-sale investments totaled $101.7 million. Together these were $180.3 million, compared with $120.9 million at December 31, 2016. Working capital was $182.7 million, up from $139.1 million.
- Nine-month operating cash flow was $30.4 million. Investing activities used $93.0 million, largely reflecting purchases of investments; financing activities provided $30.2 million, including $31.4 million from stock-option exercises. Cash, cash equivalents and restricted cash decreased by $31.2 million, while funds shifted substantially into investments.
- No borrowings were outstanding under the $10 million revolving credit facility; the company reported compliance with covenants. Management said available cash, investments and borrowing capacity should cover operating and capital needs for the foreseeable future. No significant changes to contractual obligations or off-balance-sheet arrangements were reported.
- $43.3 million, or 24% of cash, cash equivalents, restricted cash and investments, was held by the Canadian subsidiary; repatriation could have adverse tax consequences. A 10% unfavorable Canadian-dollar exchange-rate change would have reduced nine-month comprehensive income by $7.2 million, according to the filing.
Outlook, risks and unusual items
- Contract risk: A foreign government customer chose an all-laboratory testing solution and did not expect to renew its rapid-HCV-test supply contract. OraSure had supplied $14 million of an $18 million contract and said it was unclear whether the customer would fulfill the remaining $4 million of purchase obligations. Management expected the nonrenewal to hurt future international HCV sales.
- Customer concentration: One customer represented 25% of Q3 revenue and 19% of nine-month revenue. Another accounted for 11% and 10%, respectively, and notified the company that its HCV supply contract would not be renewed at that time.
- Management anticipated continued pressure on domestic professional HIV sales due to CDC testing guidelines favoring competing laboratory immunoassays, reduced government funding, and pricing and product competition. It also cited sole-source suppliers and reliance on third-party manufacturers as supply risks.
- Growth drivers included strong DNAG demand, particularly from a large consumer-genetics customer, increased international HIV self-test sales, and HCV product sales. OraSure noted that the large-customer-driven DNAG demand and customer ordering patterns could affect results.
- The Gates Foundation agreement, begun in 2017, supports affordable HIV self-test sales in 50 developing countries, with funding capped at $20 million over four years and $6 million annually. BARDA also exercised additional funding options for Ebola and Zika test development.
- The $12.5 million Ancestry.com litigation settlement was recognized in Q1 2017. The company reported ordinary-course legal matters were not expected to have a material adverse effect. No formal financial guidance was provided.
Important facts for investors to verify
- Whether the foreign government fulfills the remaining $4 million purchase obligation and whether any replacement business offsets the expected HCV sales decline.
- How the loss of the government contract and the other customer’s nonrenewal affect subsequent HCV revenue, customer concentration and inventory.
- Whether DNAG’s rapid growth, including sales to its large consumer-genetics customer, is sustained and at what margins.
- Whether lower gross margins, scrap and spoilage costs, and domestic HIV and cryosurgical weakness persist.
- The distinction between recurring operating performance and results containing the $12.5 million settlement gain; also monitor tax expense, cash conversion and working-capital movements.
- Any changes in liquidity, Canadian cash repatriation constraints, foreign-exchange exposure, supplier dependence or credit-facility covenant compliance.