OraSure Technologies, Inc. — Q1 2019 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. OraSure develops and sells diagnostic tests and specimen-collection products, and provides genomics and microbiome services. Its two segments are OSUR and DNAG. Amounts below are in U.S. dollars; financial-statement amounts are in millions unless stated otherwise.
Financial performance
- Revenue: $30.1 million, down 28% from $42.0 million. Product revenue fell 26% to $28.3 million; other revenue fell 51% to $1.8 million.
- Profit and margins: Gross profit was $18.1 million and gross margin improved to 60% from 58%. Operating loss widened to $3.8 million from $0.5 million. Net loss was $3.3 million, or $0.05 per diluted share, versus $2.1 million, or $0.03 per share.
- Cash flow: Operating cash flow was $0.5 million, compared with $7.6 million. Investing activities used $16.2 million, including $13.3 million net cash paid for acquisitions; financing activities used $4.3 million. Cash and cash equivalents declined $18.9 million to $69.5 million.
- Liquidity: Cash, cash equivalents, and available-for-sale securities totaled $183.6 million, down from $201.3 million at year-end 2018. Working capital was $178.0 million, versus $191.3 million. Current assets were $205.3 million and current liabilities $27.3 million.
- Debt and obligations: The company terminated its $10 million revolving credit facility on March 29; no borrowings were outstanding at termination. It repaid $0.7 million of acquired Novosanis loans. At quarter-end, lease liabilities totaled $5.5 million. Acquisition agreements may require up to $32.4 million of additional contingent consideration over three years; the recorded liability was $5.6 million.
Material changes and drivers
- DNAG revenue declined 40% to $11.9 million, primarily because a large consumer-genetics customer changed its strategy and purchasing patterns; genomics revenue fell 53%. Microbiome revenue rose 83%, including CoreBiome laboratory services and increased collection-product sales.
- OSUR revenue declined 17% to $18.2 million in the segment note. Lower HIV-test sales, including timing of African customer orders and U.S. competition, were partly offset by higher HCV-test sales. The MD&A separately presents segment revenue on a product-revenue basis; investors should note the differing presentations.
- Q1 2019 included acquisitions of CoreBiome and Novosanis, completed January 4 for approximately $13.4 million aggregate consideration, funded with cash. Together they contributed $1.1 million of revenue and a $1.5 million net loss after acquisition. Acquired intangible assets were $8.4 million and goodwill was $10.0 million.
- Q1 2019 results included $1.3 million of non-cash expense from the increased fair value of contingent consideration and $0.6 million of acquisition costs. Management estimated these charges reduced EPS by approximately $0.03. Q1 2018 included $6.4 million of executive-transition costs, which did not recur.
- Despite the higher gross margin, lower revenue and acquisition-related expenses contributed to the larger operating loss. The 2018 comparison also benefited from the absence in 2019 of the prior-year transition costs.
Outlook, risks, and unusual items
- The filing provides no specific revenue or earnings guidance. Management said cash and investments should be sufficient for current operating and capital needs for the foreseeable future, while noting that needs could vary with acquisitions, R&D, litigation, regulatory approvals, and other factors.
- Management cited lower HIV and genomics demand drivers, including customer purchasing changes, competition, and timing of international orders. The Zika development contract was substantially completed in early 2019, reducing related R&D funding revenue.
- Potential risks include dependence on sole-source vendors and third-party manufacturing, customer and distributor purchasing patterns, acquisition integration and earn-out estimates, product acceptance and regulatory requirements, and foreign-currency exposure. About $76.0 million of cash and securities was held by the Canadian subsidiary; repatriating amounts above certain levels could have adverse tax consequences.
- DNA Genotek is in binding arbitration with Ancestry over whether future saliva-collection products are covered by licensed patents and subject to royalties. The proceeding was at an early stage; the company said it could not predict the outcome or future royalty receipts.
- A 10% unfavorable move in Canadian-dollar and euro exchange rates would have reduced Q1 comprehensive income by approximately $10.4 million, according to the filing. Management reported disclosure controls were effective and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether the decline in genomics sales reflects a persistent change in the large customer’s demand and how sales develop across the DNAG portfolio.
- Progress integrating CoreBiome and Novosanis, their operating performance, and the assumptions underlying up to $32.4 million of contingent consideration.
- Whether HIV-test sales stabilize and whether HCV, microbiome, and other product growth can offset declines in other lines.
- The outcome of the Ancestry arbitration and any resulting effect on royalty income.
- Cash-generation trends, the use of liquidity for acquisitions and other needs, and potential tax consequences of repatriating foreign-held funds.