OraSure Technologies, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited consolidated results include OraSure and wholly owned subsidiary DNA Genotek (DNAG). The company develops and sells diagnostic tests, specimen-collection products, and cryosurgical devices.
Financial performance
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $31.4 | $30.4 | $60.4 | $57.5 |
| Gross profit | $21.1 | $20.7 | $41.4 | $37.7 |
| Gross margin | 67% | 68% | 68% | 66% |
| Operating income | $4.3 | $2.7 | $7.0 | $2.4 |
| Net income | $3.8 | $2.0 | $6.3 | $2.1 |
| Diluted EPS | $0.07 | $0.03 | $0.11 | $0.04 |
- Q2 revenue increased 3%; product revenue grew 5% to $27.6 million while other revenue declined 7% to $3.8 million. First-half revenue increased 5%, with product revenue up 5% and other revenue up 3%.
- Q2 operating income rose to $4.3 million, primarily reflecting lower sales and marketing costs, partly offset by higher general and administrative expenses. First-half operating income increased to $7.0 million on higher revenue, improved gross margin, and lower R&D and sales and marketing costs.
- First-half net cash from operating activities was $16.7 million, versus $3.4 million used in the prior-year period. Cash and cash equivalents were $105.7 million and short-term investments were $7.7 million at June 30. Working capital was $120.3 million.
- Total assets were $199.9 million and total liabilities were $31.1 million at June 30. The filing reports no borrowings or debt balance; debt is not separately identified in the supplied filing text.
Business and material changes
- OraSure’s OSUR segment includes diagnostics and cryosurgical products; DNAG primarily sells oral-fluid genetic collection devices. Q2 segment revenue was $22.9 million for OSUR and $8.4 million for DNAG. First-half segment revenue was $45.1 million and $15.3 million, respectively.
- Growth reflected stronger HCV testing, international HIV sales, cryosurgical products, and molecular collection systems. Q2 international revenue was $7.3 million, 23% of total, versus $5.3 million, or 17%, a year earlier.
- Domestic professional HIV sales remained under pressure from competing laboratory-based tests and CDC testing guidelines. Risk-assessment product revenue declined, while international HIV and HCV sales increased; management cautioned that international orders can be irregular and funding-dependent.
- DNAG’s commercial sales were affected by the bankruptcy of two customers, which contributed about $1.1 million of Q2 2015 sales and $1.9 million in first-half 2015. The company reported no unreserved collections exposure related to those customers.
Outlook, risks, and unusual items
- No formal revenue or earnings guidance is provided. Management said available cash was expected to fund operating and capital needs for the foreseeable future, while noting that requirements could change with acquisitions, R&D, clinical testing, litigation, capital spending, regulatory approvals, and commercialization needs.
- OraSure and AbbVie mutually shortened their HCV co-promotion agreement: it ends December 31, 2016, rather than 2019. AbbVie will then have no further financial obligations or co-promotion duties. The remaining $12.2 million of related deferred revenue at June 30 was to be recognized ratably as other revenue over the remaining six months of 2016. OraSure said it would no longer pay AbbVie for detailing and could pursue other promotional partners.
- Other revenue included $6.7 million of AbbVie-related revenue and $0.9 million of BARDA Ebola-test development funding in the first half. BARDA’s grant provides up to $10.4 million in total funding, subject to phases and options.
- Key risks include dependence on sole-source suppliers and third-party manufacturing, competition and regulatory or funding changes, variability in international demand, and foreign-exchange exposure. A 10% unfavorable Canadian-dollar exchange-rate change would have reduced first-half comprehensive income by $4.6 million, according to the filing.
- DNAG is pursuing patent litigation involving Ancestry and Spectrum. The Ancestry case includes counterclaims and patent-review proceedings; the Spectrum matters include jurisdiction and patent-review issues. Management said ordinary-course legal matters were not expected to have a material adverse effect, but outcomes remain uncertain.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Management reported no material changes to the previously disclosed risk factors.
Important facts for investors to verify
- Whether the expected recognition of the $12.2 million AbbVie deferred-revenue balance occurred as planned, and the revenue and earnings impact after the agreement ends.
- Whether HIV and HCV product trends persist, including pressure on domestic professional HIV sales and the sustainability of international growth.
- Progress and outcomes in the DNAG patent disputes and related USPTO review proceedings.
- Customer demand, supply continuity, and exposure to sole-source vendors and third-party manufacturers.
- Cash generation and capital allocation, including share repurchases, capital expenditures, and the company’s stated liquidity outlook.