OraSure Technologies, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; unaudited. The company develops, manufactures and sells oral-fluid diagnostics and collection devices, other diagnostic products, and cryosurgical devices.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $19.1 million | $19.2 million | $36.5 million | $37.2 million |
| Product revenue | $18.7 million | $17.7 million | $35.7 million | $34.3 million |
| Gross profit / margin | $12.3 million / 64% | $12.2 million / 63% | $23.5 million / 64% | $23.6 million / 63% |
| Operating loss | $(2.4) million | $(0.5) million | $(4.9) million | $(2.7) million |
| Net loss / diluted loss per share | $(2.4) million / $(0.05) | $(0.6) million / $(0.01) | $(5.0) million / $(0.11) | $(2.7) million / $(0.06) |
Q2 product revenue rose 6%, led by infectious-disease testing (+13%) and substance-abuse testing (+4%); lower cryosurgical and insurance-risk-assessment sales partly offset growth. Licensing and product-development revenue fell 76% in Q2 and 75% for the first half, mainly because 2010 included Merck HCV collaboration milestone payments ($1.0 million in Q2 and $2.0 million in the first half). R&D expense increased 70% in Q2 and 56% for the first half, primarily due to clinical work on the OraQuick HIV OTC test. Higher R&D spending contributed to the wider operating and net losses.
Management attributed improved gross margin to lower direct labor costs and better overhead absorption following staffing optimization and manufacturing automation; these benefits more than offset the loss of prior-year HCV milestone revenue. No income tax benefit was recorded because the company maintained a full valuation allowance against deferred tax assets.
Cash, liquidity and debt
At June 30, 2011, cash and cash equivalents were $75.4 million, with no short-term investments; cash plus short-term investments had been $75.7 million at December 31, 2010. Working capital was $77.0 million, versus $77.8 million at year-end. First-half operating cash use was $0.4 million, compared with $3.1 million in 2010. Investing activities provided $0.7 million, and financing activities provided $1.2 million, including $2.3 million from stock-option exercises. Capital expenditures were $1.2 million.
The balance sheet reported $7.5 million of current long-term debt. The $10 million Comerica credit facility carried a fixed 4.15% rate, was extended to September 27, 2011, and had no available borrowings at June 30. The company was covenant-compliant and evaluating refinancing or other borrowing options. Management said available cash was expected to fund operations and capital needs for at least twelve months, including the planned DNA Genotek purchase.
Outlook, developments and risks
- DNA Genotek acquisition: Announced July 25, 2011, after quarter-end. OraSure agreed to acquire the company for C$50 million (approximately US$53 million at the announcement-date exchange rate), subject to adjustments and customary closing conditions; closing was expected in Q3 2011. The cash payment is exposed to U.S./Canadian-dollar movements. Management cited integration, transaction-cost and execution risks.
- Product and regulatory pipeline: The FDA’s review of the OraQuick HCV CLIA waiver application remained pending; additional study data were requested, with related work expected to extend into Q4 2011. The company expected to complete its OraQuick HIV OTC clinical study in Q3 and submit the final module near year-end. FDA-cleared Roche oral-fluid assays for PCP, opiates, cocaine, methamphetamines and amphetamines were expected to be marketed with OraSure’s Intercept device in Q4; marijuana assay work was expected to finish in late 2011 or early 2012.
- Business risks: Management cited intense competition in HIV and substance-abuse testing, potential distributor order variability and concentration, dependence on sole-source components, economic weakness and reduced public funding, and regulatory and product-acceptance uncertainty. OTC cryosurgical sales declined, and the Reckitt Benckiser distribution contract had been extended only through July 2011 while further extension discussions continued.
- The filing provided no specific revenue or earnings guidance. It noted that interim results are not necessarily indicative of full-year results. Ordinary-course legal matters were not expected by management to materially harm financial position or results.
Most important facts for investors to verify
- Whether the DNA Genotek acquisition closed, its final cash cost and foreign-exchange impact, and whether expected benefits justified integration and transaction costs.
- How OraSure refinanced or otherwise addressed the Comerica facility’s September 27, 2011 maturity.
- FDA progress and timing for the HCV CLIA waiver and HIV OTC test, and whether the expected Roche/Intercept assay launch occurred.
- Whether product-sales growth can offset lower licensing milestones, continued R&D spending and distributor-related weakness, particularly in OTC cryosurgical products.