OraSure Technologies, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Amounts below are in millions of dollars, except per-share data, percentages, or where noted. The company reports OSUR (diagnostics) and DNAG (molecular products and services) segments.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net revenue | $48.0 | $36.0 | $108.9 | $104.9 |
| Gross profit | $30.3 | $21.6 | $63.7 | $64.7 |
| Gross margin | 63% | 60% | 59% | 62% |
| Operating income (loss) | $4.4 | $13.1 | $(13.1) | $14.5 |
| Net income (loss) | $1.0 | $13.1 | $(16.8) | $14.2 |
| Diluted earnings (loss) per share | $0.01 | $0.21 | $(0.25) | $0.23 |
| Cash from operating activities | Not separately stated for the quarter | $2.2 | $10.8 |
- Q3 revenue rose 33%, led by $18.4 million of COVID-19-related molecular collection-device sales, which had no comparable prior-year sales. DNAG revenue increased 74% in the quarter, while OSUR revenue declined 8%.
- For the first nine months, revenue rose 4%; COVID-19-related sales totaled $27.3 million. This was partly offset by lower genomics, HIV and HCV testing, risk-assessment, and microbiome sales, and the absence of cryosurgical revenue after the 2019 business sale.
- Q3 operating income was below the prior-year period, which included a $10.2 million gain on the cryosurgical business sale and $2.4 million of noncash income from revaluing acquisition contingent consideration. Q3 2020 operating results also reflected increased COVID-19 development spending.
- Nine-month operating results were affected by higher R&D and staffing costs, lower gross margin, a $0.4 million noncash contingent-consideration charge, and $0.4 million of UrSure acquisition costs. The 2019 comparison included the $10.2 million sale gain and $0.8 million of noncash contingent-consideration income.
Liquidity, cash flow and obligations
- At September 30, 2020, cash and cash equivalents were $162.9 million and available-for-sale securities were $100.8 million, totaling $263.7 million; working capital was $265.8 million. Cash and securities totaled $189.8 million at December 31, 2019.
- Nine-month operating cash flow was $2.2 million, down from $10.8 million. Inventory increased $7.4 million, in part to prepare for anticipated COVID-19 testing demand.
- Financing provided $91.6 million, primarily from a June public offering that generated approximately $95.0 million net proceeds. Investing used $3.9 million, including capital expenditures of $11.2 million, partly offset by investment maturities.
- The filing reports no loan balance. Lease liabilities totaled $6.5 million ($4.9 million operating and $1.6 million finance). Management said existing cash and securities should fund foreseeable operating and capital needs.
- $82.0 million, or 31% of cash, cash equivalents and securities, was held by the Canadian subsidiary; repatriating amounts above certain levels could have adverse tax consequences.
Outlook, risks and unusual matters
- Management said the pandemic materially reduced traditional HIV/HCV testing, workplace drug testing, and some genomics and research demand; the duration and severity of effects were uncertain. COVID-19-related collection-device sales provided an offset, but management could not predict whether future opportunities would offset other lost revenue.
- The company was developing an OraQuick coronavirus antigen test, with an initial FDA Emergency Use Authorization submission for professional use expected in Q1 2021; self-test submissions were expected to follow. It had submitted an EUA application for its oral-fluid SARS-CoV-2 antibody ELISA in October 2020 and planned commercialization in Q4, subject to authorization.
- Several DNA Genotek collection devices received or were included in FDA EUAs for COVID-19 testing. Additional authorizations, validation, product development, and demand were not assured.
- UrSure was acquired in July 2020. The agreement provides for up to $28.0 million of additional contingent consideration over four years, subject to performance milestones. The company also disclosed up to $22.5 million of potential contingent consideration under earlier acquisitions through July 2021.
- An arbitration concerning a newly issued DNAG patent and Ancestry products was expected to conclude in the first half of 2021. Management did not expect ordinary-course legal proceedings to materially harm financial position or results, but outcomes are uncertain.
- Other disclosed risks include reliance on sole-source suppliers, customer and distributor purchasing patterns, regulatory approvals and compliance, acquisition integration, foreign currency exposure, and the effects of COVID-19. A 10% unfavorable Canadian-dollar and euro exchange-rate movement was estimated to reduce nine-month comprehensive income by approximately $11.3 million.
- Management reported disclosure controls were effective as of September 30, 2020 and no material change in internal control over financial reporting during the quarter. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether COVID-19 collection-device demand persists and offsets pandemic-related weakness in the company’s other markets.
- Regulatory status, timing, commercialization costs, and customer uptake for the antigen and antibody tests and any expanded device uses.
- Whether genomics, HIV/HCV, microbiome, and workplace testing demand recovers, including the impact of large-customer order timing.
- Cash generation, inventory levels, and operating expenses, given the nine-month net loss and lower operating cash flow.
- Potential dilution and future payments: the public offering issued 9.2 million shares, and contingent consideration may be payable under UrSure and prior acquisitions.
- Developments in the Ancestry arbitration, supplier availability, and the tax and practical implications of cash held outside the United States.