OraSure Technologies, Inc. — Q1 2015 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2015; financial statements are unaudited. OraSure develops and sells diagnostic tests, specimen-collection products and cryosurgical devices. Its reportable businesses are OSUR and DNA Genotek (DNAG). Amounts below are in U.S. dollars; financial figures are in millions unless otherwise stated.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Net revenue | $27.1 | $23.5 |
| Gross profit / margin | $17.0 / 63% | $13.9 / 59% |
| Operating income (loss) | ($0.3) | ($5.6) |
| Net income (loss) | $0.1 | ($5.6) |
| Cash used in operating activities | $6.6 | $7.7 |
| Cash and short-term investments | $89.5 at March 31 | $97.9 at December 31, 2014 |
| Working capital | $105.6 at March 31 | $104.8 at December 31, 2014 |
Revenue increased 15%, although product revenue rose only 1% to $23.8 million. The remaining $3.3 million was other revenue, principally ratable recognition of AbbVie HCV co-promotion payments. Basic and diluted earnings per share were reported as $0.00, versus a loss of $0.10 in Q1 2014. No debt balance is presented on the balance sheet.
Cash declined $8.4 million from year-end. Operating cash use included decreases in accrued liabilities, deferred revenue and accounts payable. Investing activities provided $0.6 million, while financing activities used $0.7 million, primarily for shares withheld or retired for tax and exercise obligations. Management said current cash was expected to fund operating and capital needs for at least the next 12 months.
Changes versus the prior comparable period
- OSUR product revenue declined 4% to $17.0 million; with $3.3 million of other revenue, total OSUR segment revenue was $20.4 million. DNAG revenue increased 17% to $6.7 million.
- OSUR infectious-disease testing revenue rose 4%, including HCV revenue up 39%; HIV revenue was down 7%. Cryosurgical revenue fell 36%, while substance-abuse testing revenue rose 15%.
- Consolidated operating loss narrowed by $5.3 million. Management attributed the improvement mainly to AbbVie-related other revenue and lower OraQuick In-Home HIV advertising and promotion costs. Sales and marketing expense fell to $7.9 million from $11.3 million; R&D rose to $3.4 million from $2.5 million.
- Currency translation produced a $3.8 million comprehensive loss adjustment, compared with a $1.8 million loss in Q1 2014; this was recorded in other comprehensive loss, not operating income.
Outlook, risks and unusual items
- HCV collaboration: The AbbVie agreement runs through December 31, 2019 and provides for up to $75 million in aggregate payments, with possible additional performance-based payments. OraSure recognized $3.3 million of agreement-related revenue in Q1; $4.1 million remained in deferred revenue at March 31. AbbVie reduced physician detailing during Q1, and the reduced activity lasted longer than expected. OraSure reported three retail pilot programs expected to begin in May 2015 and anticipated identifying additional employer opportunities in the second half of 2015. No formal financial forecast was provided.
- Market and execution risks: Management cited CDC testing-guideline changes, price competition and funding constraints affecting HIV testing; reimbursement, public funding and competitive HCV therapies affecting HCV demand; and distributor consolidation, competing private-label products and customer ordering patterns affecting cryosurgical sales. DNAG depends on third-party suppliers, and the company also cited reliance on certain sole-source vendors.
- Legal contingency: In May 2015, after quarter-end, DNAG sued Ancestry.com DNA LLC, alleging patent infringement and breach of agreements, among other claims, and seeking injunctive relief and damages. Management said ordinary-course legal matters were not expected to materially adversely affect future financial position or results; the filing does not quantify the potential outcome of the new suit.
- Other: The company maintained a full valuation allowance against U.S. net deferred tax assets. Management reported no goodwill impairment indicators at March 31. It also stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether AbbVie’s reduced physician detailing and the planned retail pilots translate into HCV test demand, milestone payments and continued co-promotion revenue.
- Whether the limited Q1 net profit and operating cash outflow improve or persist, and how cash balances develop against the stated 12-month funding expectation.
- Whether declining domestic HIV and cryosurgical product sales stabilize, and whether DNAG’s growth continues.
- The outcome and potential financial impact of DNAG’s May 2015 litigation against Ancestry, and any developments in supplier or distributor relationships.
- The effect of foreign-exchange movements, the U.S. deferred-tax valuation allowance, and future impairment assessments on reported results.