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OraSure Technologies Q4 Revenues Down 3 Percent

NEW YORK (360Dx) – OraSure Technologies reported after the close of the market on Wednesday that its fourth quarter revenues fell 3 percent year over year, largely due to an 11 percent dip in net product revenues during that period.

For the three months ended Dec. 31, 2018, the point-of-care diagnostic testing and specimen collection device manufacturer reported revenues of $50.2 million, down from $52.0 million a year earlier but beating the average Wall Street estimate of $47.8 million.

The company said the decline in product revenues for Q4 resulted from lower sales of its molecular collections products and lower domestic sales of its HIV and HCV tests, but was partially offset by higher international sales of its OraQuick HIV Self-Test and OraQuick HCV test.

The firm's product revenues for the quarter fell to $44.8 million from $50.2 million in Q4 2017. Within products, molecular collections systems revenues fell 15 percent to $25.4 million from $29.8 million, which included a 72 percent increase in revenues from microbiome products to $1.9 million from $1.1 million, and an 18 percent decrease in genomics product revenues to $23.5 million from $28.7 million. Including royalty income, molecular collection systems revenues rose 2 percent in Q4 to $30.2 million.

On a conference call with analysts following the release of the earnings, OraSure CFO Robert Cuca said the drop in genomics products revenues in Q4 was largely due to lower sales to a large consumer genomic customer. "The primary reason for this is that sales to this customer in the fourth quarter of 2017 were unusually high as a result of unexpected consumer demands that occurred during that quarter," Cuca added.

The firm's Q4 revenues from infectious disease testing fell 3 percent to $13.6 million from $14.1 million a year earlier. Risk assessment testing revenues fell 8 percent to $2.9 million from $3.1 million, and cryosurgical systems revenues fell 9 percent to $2.9 million from $3.2 million.

Within the firm's infectious disease testing revenues, sales of its OraQuick tests for HIV and HCV fell 5 percent to $13.0 million from $13.5 million in Q4 2017. Total HIV sales fell 7 percent to $9.4 million from $10.1 million — domestic HIV testing sales fell 23 percent to $5.0 million from $6.5 million, but this was somewhat offset by a 23 percent increase in international HIV testing sales to $4.4 million from $3.6 million.

Total HCV testing sales rose 1 percent to $3.7 million from $3.6 million in the year-ago quarter — a 16 percent decrease in domestic HCV testing sales to $2.1 million from $2.5 million was offset by a 40 percent increase in international HCV testing revenues to $1.6 million from $1.1 million. The international increase was due to continued growth in Asia and Africa.

"With the highest annual revenues in our history and strong profitability, 2018 was another financially successful year for OraSure. Our OraQuick international HIV business and our molecular business continued to drive performance with double-digit growth from 2017 to 2018," OraSure President and CEO Stephen Tang said in a statement. "The acquisitions we announced in January were the first outcomes of our robust innovation-driven growth strategy."

Sales of the OraQuick HIV Self-Test for Q4 included $855,000 of support payments under the company's charitable support agreement with the Bill & Melinda Gates Foundation, compared to $589,000 in Q4 2017. Royalty income from a litigation settlement associated with a molecular collection device was $4.8 million for the fourth quarter. There were no such royalties in 2017.

Other revenues for Q4 fell to $578,000 from $1.8 million a year earlier, largely due to lower funding from the US Biomedical Advanced Research Development Authority (BARDA) and lower cost reimbursement under the company's charitable support agreement with the Gates Foundation.

OraSure's Q4 net income rose to $10.3 million, or $.16 per share, from $7.3 million, or $.12 per share, in the year-ago period, beating the Wall Street estimate of $.11 per share.

The firm's R&D expenses for the quarter rose 8 percent to $4.1 million from $3.8 million in Q4 2017, and its SG&A costs rose 26 percent to $18.2 million from $14.5 million.

For full-year 2018, OraSure reported that total revenues rose 9 percent to $181.7 million from $167.1 million a year earlier, beating the average Wall Street estimate of $179.3 million.

The firm's product revenues for the year rose 2 percent to $165.4 million from $162.0 million in 2017. Within products, molecular collections systems revenues rose 15 percent to $86.5 million from $75.1 million, which included a 92 percent increase in revenues from microbiome products to $6.7 million from $3.5 million, and an 11 percent increase in genomics product revenues to $79.8 million from $71.6 million. Including royalty income, molecular collection systems revenues rose 28 percent in 2018 to $96.1 million.

During the call, Tang noted that the overall outlook for OraSure's genomics products and the prospects for its molecular business are strong, citing the acquisition of 56 new customers in Q4 and 332 during the year. He also said that the company signed five new pharma and one new direct-to-consumer customer in the microbiome space during Q4.

The firm's 2018 revenues from infectious disease testing fell 9 percent to $56.1 million from $62.0 million a year earlier. Risk assessment testing revenues fell 5 percent to $12.1 million from $12.7 million, and cryosurgical systems revenues fell 12 percent to $10.8 million from $12.3 million.

Within the firm's infectious disease testing revenues, sales of its OraQuick tests for HIV and HCV fell 11 percent to $53.9 million from $60.6 million in 2017. Total HIV sales rose 18 percent to $41.5 million from $35.1 million — domestic HIV testing sales fell 18 percent to $19.7 million from $23.8 million, but this was offset by a 93 percent increase in international HIV testing sales to $21.8 million from $11.3 million.

Total HCV testing sales fell 51 percent to $12.4 million from $25.4 million in 2017 — this included an 11 percent decrease in domestic HCV testing sales to $7.5 million from $8.4 million and a 71 percent decrease in international HCV testing revenues to $4.9 million from $17.0 million.

The company said that sales increases of OraQuick HIV products in Q4 and FY2018 were primarily the result of higher sales of the OraQuick HIV Self-Test. Further, the decline in FY2018 OraQuick HCV product sales was primarily the result of the non-renewal of a foreign government supply contract in support of a countrywide HCV eradication program at the end of 2017. This program contributed $11.8 million in sales during FY2017 and $270,000 during Q4 2017.

Sales of the OraQuick HIV Self-Test for 2018 included $4.4 million of support payments from the Bill & Melinda Gates Foundation compared to $1.0 million in 2017. Royalty income from a litigation settlement associated with a molecular collection device was $9.7 million for the year.

Other revenues for 2018 rose to $6.7 million from $5.1 million a year earlier, due to higher Ebola- and Zika-related funding received from BARDA and increased cost reimbursement from the Gates Foundation.

OraSure's 2018 net income fell to $20.4 million, or $.33 per share, from $30.9 million, or $.51 per share, in the year-ago period, beating the Wall Street estimate of $.28 per share.

The firm's R&D expenses for the quarter rose 22 percent to $16.3 million from $13.4 million in Q4 2017, and its SG&A costs rose 19 percent to $68.9 million from $57.8 million.

OraSure ended the year with $88.4 million in cash and cash equivalents, and $68.1 million in short-term investments.

For the first quarter, the company expects net revenues of $29.0 million to $30.5 million and is projecting a net loss of $.06 to $.07 per share. Analysts are expecting revenues of $45.4 million and earnings per share of $0.07.

On the earnings call, Cuca noted that the lower-than-expected projections for Q1 are being largely driven by lower expected sales to the large consumer genomics customer he referenced as having also purchased fewer genomics products in Q4.

"As stated on prior calls, sales to this customer were unusually high in the fourth quarter of 2017 and moved to what appeared to be a more normal level in the fourth quarter of 2018 in response to seasonal promotional activity at the end of the year," Cuca said. "This large customer is now further changing its purchasing patterns and promotional strategies, which in turn is driving our guidance for the first quarter of this year."

He also noted that OraSure only recently learned of this customer's intention to decrease its products orders and said that although the company is disappointed, it expects that the effect of these changes will be mitigated by growth in other genomics accounts over the course of the year.

"We do not view the first quarter as an indication in the capacity anticipated for the rest of 2019," Cuca said. "Our expectation is that the second half of 2019 [will] deliver higher revenues [than] the first half, much as we have seen in 2017 and 2018. We are also confident in our ability to deliver profitability in 2019."

Tang further noted that OraSure has an annual minimum ordering limit from the customer in question, and the firm is being conservative with its estimates for this customer for the rest of the year.

In a note to investors on Thursday, Jefferies analyst Brandon Couillard wrote that the Q1 guidance shortfall was "alarming," and speculated that this large customer was most likely 23andMe.

"Essentially all the shortfall stems from the molecular unit due to 'changes in purchasing patterns & promo strategies' at one large consumer genomics client (read: 23andMe). It's hard to know exactly what that means, precisely what has changed (quite abruptly) with its 'approach to the market,' or how long it will last," Couillard said. "Given 23andMe is 60 to 70 percent of [molecular] revs, the guide seems to suggest zero orders from this key customer in 1Q19."

Given the importance of the molecular business to OraSure overall, he added, this will likely remain an overhang until the second half of the year when the picture on product orders clears up a bit. For that reason, Couillard has lowered the price target for OraSure's stock to $11.

In his own note to investors on Thursday, Canaccord Genuity analyst Mark Massaro also speculated that the large customer was 23andMe, noting that recent news from Illumina, OraSure, and LabCorp has indicated that "something is going on" at 23andMe.

"We suspect that 23andMe is possibly (1) upgrading its technology to enable greater health insights to patients; and (2) reducing its test discounting or its heavy TV ad spend, at least in 1H/19 vs. prior years," Massaro wrote. "While 23andMe is a private company, we have talked to a 23andMe employee who understood the benefit of moving up the value chain to exome plus or whole genomes (from genotyping) at some point in the future."

As for OraSure, Massaro reiterated his Buy rating but dropped his price target on the stock to $16 from $18. "After talking to management, and given our insights on the DTC genetic testing space, we believe this is a 1H/19 timing issue. What we don't know (nor does OSUR) is what the impact will be for Q2/19 (OSUR has ~3 months of visibility)," he added.

OraSure's stock fell nearly 25 percent to $9.63 in Thursday morning trading on the Nasdaq.