OraSure Technologies, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless noted. OraSure develops and sells diagnostic tests, specimen collection products and cryosurgical devices through its OSUR and DNAG segments.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $40.2m | $31.4m | $72.7m | $60.4m |
| Gross profit / margin | $25.5m / 63% | $21.1m / 67% | $45.8m / 63% | $41.4m / 68% |
| Operating income | $6.9m | $4.3m | $22.8m | $7.0m |
| Net income | $5.4m | $3.8m | $17.9m | $6.3m |
| Diluted EPS | $0.09 | $0.07 | $0.30 | $0.11 |
- Q2 revenue grew 28%; product revenue rose 42% to $39.1m, while other revenue fell 72% to $1.0m. First-half revenue grew 20%; product revenue increased 34% to $70.6m.
- DNAG was the main growth contributor: revenue increased 90% in Q2 to $16.1m and 75% for the first half to $26.8m, primarily on stronger consumer genetics demand and increased microbiome product sales. OSUR revenue, including other revenue, was $24.1m in Q2 and $46.0m in the first half.
- Q2 operating income improved despite lower gross margin. First-half operating income included a $12.5m litigation settlement gain; reported earnings therefore include a significant unusual item.
- First-half operating cash flow was $21.7m, versus $16.7m in 2016; management notes it included the settlement. Investing cash outflow was $45.2m, mainly reflecting purchases of short-term investments. Financing cash inflow was $19.8m, including $21.0m from stock-option exercises.
- At June 30, cash, cash equivalents and restricted cash totaled $106.7m; short-term investments were $55.4m. Combined liquidity was $162.1m, and working capital was $182.5m. Total assets were $258.4m.
- No credit-facility borrowings were outstanding. The revolving facility provides up to $10m, with an option to request up to $5m of additional commitments; the company reported covenant compliance. The filing says liquidity and available borrowing capacity should cover operating and capital needs for the foreseeable future.
- Shares outstanding were 59.3m at June 30, compared with 56.0m at year-end; option exercises generated substantial cash proceeds and contributed to share-count growth. The filing reports no material off-balance-sheet arrangements.
Material changes, outlook and risks
- Growth reflected higher molecular and OraQuick HCV sales, as well as stronger international HIV self-test sales. International HCV sales benefited substantially from shipments supporting a foreign government testing and treatment program. Conversely, domestic professional HIV sales declined, and cryosurgical revenue fell 10% for the first half.
- Gross margin declined year over year, partly because 2016 included AbbVie HCV co-promotion exclusivity revenue ($3.4m in Q2 and $6.7m in the first half), which ended with the agreement’s termination on December 31, 2016. First-half margin was also pressured by lower-margin product mix and higher scrap and spoilage costs.
- For domestic professional HIV tests, management expects continued pressure from CDC guidance favoring competing laboratory-based fourth-generation assays, funding changes and product and price competition. Management also cited staffing-cost increases and reliance on sole-source suppliers and third-party manufacturers as risks.
- After quarter-end, the company reported that its HIV self-test was prequalified by WHO and selected for Phase II of the STAR project in Africa, expected to begin in Q4 2017 and deploy approximately 4m tests over two years; OraSure believed it would supply the vast majority. A June 2017 Gates Foundation agreement supports discounted self-test sales in 50 developing countries, with funding capped at $20m over four years and $6m in any year. These are opportunities, not guaranteed sales or revenue.
- No specific company revenue or earnings guidance is provided in the supplied filing text. Management identified regulatory approvals, market acceptance, customer ordering and concentration, government funding, competition, product quality, litigation, foreign exchange and execution of international programs among factors that could affect results. A 10% adverse Canadian-dollar exchange-rate change was estimated to reduce first-half comprehensive income by $6.4m.
- The company recorded $5.5m of income tax expense for the first half, including additional Canadian taxes associated with the litigation settlement, and continues to maintain a full valuation allowance against U.S. deferred tax assets. Ordinary-course legal matters were not expected by management to have a material adverse effect; the filing reports no material change to previously disclosed risk factors.
Important facts for investors to verify
- How much future growth is sustainable in DNAG and international HCV sales, given customer demand, program timing and potential concentration?
- What are normalized operating income, cash generation and margins excluding the $12.5m settlement gain and the discontinued AbbVie exclusivity revenue?
- Whether the anticipated STAR deployment and Gates-supported sales convert into orders, and on what timing, margins and funding terms.
- Continued trends in domestic professional HIV sales, gross margin, inventory and receivables, and reliance on major customers and sole-source suppliers.
- Potential dilution from equity awards and the financial effects of Canadian-dollar movements, taxes and future use of the credit facility.