OSUR - OraSure Technologies: Outlook Is More Than Just Covid Testing

2023-11-17 16:16:57 ET

Summary

• OraSure Technologies reported Q3 earnings which beat expectations.
• Despite declining sales of COVID-19 antigen rapid tests, the company is benefiting from climbing demand for its broader portfolio of infectious diseases diagnostics.
• Overall solid fundamentals support a positive long-term outlook.

OraSure Technologies Inc ( OSUR ) is emerging as a turnaround story following extreme volatility in recent years. The company recognized as a leader in at-home diagnostics, was a big winner during the pandemic with its Covid-19 rapid tests, but is now moving forward with a broader opportunity from its "core" product portfolio including at-home, over-the-counter products.

Indeed, the stock is up nearly 40% over the past year, with the latest quarterly results highlighted by steady growth and improved profitability. While we can keep OSUR in a category of risky small-caps, we believe its long-term outlook is positive and deserves a spot on the radar of more investors.

OSUR Financials Recap

OSUR reported Q3 non-GAAP EPS of $0.27 , coming in $0.19 ahead of estimates and up from $0.14 in the period last year. While revenue of $89.2 million, declined by -23% year-over-year, the context here reflects the comparison period in 2022 where the company generated $80.0 million in sales from its "InteliSwab COVID-19" test, a level that declined to $50.2 million this past quarter.

More favorably, the core portfolio capturing trends in non-COVID products generated 7% revenue growth, reaching $39.0 million. This has been achieved by both an expanding lineup of tests as well as new distribution partners.

That shifting sales dynamic is also reflected in a higher adjusted-growth margin reaching 50%, and the non-GAAP operating margin at 23.1%, up from 10.0% in Q3 2022. Part of that has been from cost savings efforts implemented at the start of the year.

Keep in mind that even with the decline of COVID-19 testing demand, the market still represents a major part of the business. As one of 12 approved U.S. manufacturers, Orasure is poised to benefit from a restart of the U.S. government-led initiative to offer free at-home tests delivered by mail free of charge to consumers through a $600 million investment.

The bigger takeaway is that while the COVID testing demand is seen as a declining business with "variable" and uncertain sales longer-term, the recent performance of the core portfolio points to a more sustainable growth runway.

In terms of guidance, management is targeting Q4 revenue between $71 and $76 million with an expectation for a continuation of firming margins. There is also an expansion of the company's "Opus Way" manufacturing facility expected to add capacity as a growth driver.

Finally, we can mention that Orasaure maintains a solid balance sheet, ending the quarter with $225 million in cash and cash equivalents against $15 million in total debt. We view the balance sheet as a strong point in the company's investment profile.

What's Next For OSUR?

The challenge for OraSure is to build up the non-COVID testing portfolio to ultimately become the earnings driver of the overall business. The good news here is that management believes the standalone core products will achieve break-even cash flow by the end of 2024.

Data suggests demand for HIV testing is growing at 5-7% each year globally, with the company's OraQuick as the only FDA-approved over-the-counter test. Similarly, the HCV "Hepatitis" test has the tailwind of identifying a disease seen with climbing rates of global incidence spotlighted by the World Health Organization.

Separately, the company's "substance abuse" segment, includes oral fluid tests covering illicit drugs that are seen as capturing market share compared to legacy urine-based tests. This is important for workplace compliance and gaining traction as an affordable solution for employee testing.

Overall, these are critical segments of diagnostics where OraSure has already captured strong brand recognition. The understanding is that the opportunity in the U.S. remains in the early stages and largely untapped internationally.

This was discussed in the latest earnings conference call :

Our differentiated HIV product also continues to resonate in international markets which contributed to our growth in Diagnostics in the quarter.

Additionally, we are expanding our menu of tests available in international markets through a new partnership agreement that will launch late this year. Through this partnership, our international team will be able to offer three new infectious disease tests for syphilis hepatitis B and hepatitis B in key markets through our existing sales channels and existing client relationships and new opportunities. We believe this expansion of our international test portfolio can provide additional fuel for future growth.

So while we're optimistic about the company's potential, the near-term financials face more uncertainty considering the variability in the Covid side of the portfolio. For 2023, the consensus is that total revenues will decline by -51% as Covid testing falls off, also dragging earnings lower.

The upside here and the bullish case for the stock will be in the possibility that the core revenue outperforms expectations, pulling forward a path for more consistent earnings sooner rather than later.

At the same time, considering the company's +$200 million net cash position, OraSure with a market cap of just $500 million is essentially trading under 1x core revenues - net of cash, a reasonable level for a stock where the core business is growing.

Final Thoughts

OraSure has made good progress in its attempt to move beyond a dependency on Covid testing. While the latest results are "good", we believe it will likely take a few more quarters of better-than-expected growth trends from the core portfolio for the stock to sustain a major breakout higher.

In the meantime, the uncertainty regarding near-term earnings and the COVID testing sales backdrop will likely keep shares volatile. We rate OSUR as a hold, looking ahead to the next quarterly report for greater clarity on 2024 trends.

For further details see: