Welcome to the OraSure Technologies, Incorporated 2021 Third Quarter Earnings Conference Call. My name is Adrian, and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

Good afternoon, and welcome to the OraSure Technologies third quarter 2021 earnings call. I am Scott Gleason, the Interim CFO and SVP of Investor Relations and Communications. Presenting with me today is Dr. Stephen Tang, our President and Chief Executive Officer. As a reminder, today’s webcast is being recorded and a recording along with the presentation accompanying the webcast can be found on our Investor Relations website. Before we begin, you should know that this call may contain certain forward-looking statements, including statements with respect to revenues, expenses, profitability, earnings or loss per share and other financial performance, product development, performance, shipments and markets, business plans, regulatory filings and approvals, expectations and strategies. Actual results could be significantly different. Factors that could affect results are discussed more fully in the company’s SEC filings, including its registration statements, its Annual Reports on Form 10-K for the year ended December 31, 2020, its quarterly reports on Form 10-Q and its other SEC filings. Although forward-looking statements help to provide complete information about future prospects, listeners should keep in mind that forward-looking statements are based solely on information available to management as of today. The company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after this call. With that, I’m pleased to turn the call over to Dr. Steve Tang.

Thanks, Scott, and thank you to everyone for joining us on the call today. This quarter, OraSure once again delivered strong top-line performance with sales of our core products growing 37% year-over-year. As an organization, we began setting the stage for even more rapid growth as we look forward to fiscal year 2022. The global pandemic is providing the impetus to fundamentally transform our company into a higher growth and more innovative organization with broader customer reach, both within and outside the United States. Perhaps as importantly, what we call effortless diagnostics, which are diagnostic products and collection kits that are so simple in design that can be used in any setting, are having a watershed moment. Consumers, healthcare workers and regulators are seeing the power of these tests in addressing our greatest public health challenges. We see significant opportunity to capitalize on these trends and utilize InteliSwab growth to permanently enhance our operational profile and our competitive positioning through investments in automation and efficiency. We will increasingly talk about these plans as we transition into fiscal year 2022. We remain highly focused on executing our strategic priorities, including capitalizing on COVID-19 testing opportunities, expanding our sample collection and molecular services businesses, and further supporting our multi-omics discovery in diagnostics, expanding our global reach and driving innovation with a focus on achieving higher growth for both internal R&D and M&A. I would now like to discuss our progress in each of these areas. First, as we look to the COVID-19 testing opportunity, we are convinced that COVID-19 testing will be an integral part of our business over the long term. Internal and external market models project testing demand based on vaccination rates in epidemiology and forecast a slow taper in disease incidence and testing over the next five years. Coupled with recent discussions with the federal government and Fortune 500 employers, we are increasingly convinced of the durability of our InteliSwab as a product for the company. As you can see on Slide 5, our epidemiological-based model forecasts a global testing market of approximately 1.1 billion rapid antigen tests by 2025. Rapid COVID-19 antigen tests, especially extremely easy-to-use tests, such as InteliSwab, are having a breakthrough moment in the United States. The ability to rapidly assess disease status outside of healthcare settings by an untrained user is proven to be a critical tool in countering the pandemic, and this is an area where OraSure has a long history and expertise. In this quarter alone, we received over $400 million in customer orders, including those from major commercial retailers such as Walgreens and Walmart and other major retail customers, which we had to turn away due to manufacturing constraints. We also had perceived orders and an increase from multiple Fortune 500 companies, major healthcare systems, and numerous entertainment and hospitality customers. You may have even noticed singer Sheryl Crow tweeting about the use of InteliSwab with our touring team. We are currently in a position where we can sell every test we can manufacture and believe this paradigm will persist into at least fiscal year 2022. This quarter, we also signed three major U.S. government contracts that are transformational for the company as we look to the future. The first is a $205 million procurement contract from the Defense Logistics Agency for InteliSwab over-the-counter tests. This contract is strategically important for the company, and we bid aggressively to ensure we would win a significant portion of this business for several reasons. First, this contract will essentially fill the factory for fiscal year 2022, providing meaningful fixed-cost absorption and ensuring we generate significant free cash flow, which we can reinvest in growth and utilize to further expand our war chest for strategic mergers and acquisitions. Importantly, given this fixed cost absorption, the contribution margin on additional testing beyond the government contract will be higher. Second, as part of the contract, we will ship product to up to 25,000 customers across the United States, expanding our customer interactions and enabling even more consumers to experience the simplicity of testing that only InteliSwab can provide. The second major contract we received was a $109 million contract with the Department of Defense to expand our manufacturing capacity for InteliSwab. This contract further integrates us as part of the government’s pandemic response program and will increase our annual capacity for InteliSwab test production to 200 million tests by early 2024. Under this contract, the capital equipment investments, installation, and validation work will be funded by the government, thereby increasing our ability to supply InteliSwab tests and improving our long-term cost structure. Finally, we will receive up to $13.6 million from the Biomedical Advanced Research Development Authority to fund our additional clinical studies in application for FDA 510(k) clearance and CLIA waiver for InteliSwab. Once received, these full regulatory clearances will ensure that InteliSwab remains commercially available long-term, even after the pandemic is declared over and the Emergency Use Authorizations are no longer allowed. We also received a label claim expansion from the FDA as it pertains to our InteliSwab COVID-19 rapid test, where the FDA revised the over-the-counter indication, enabling everyone with symptoms to use only one test to determine if they have COVID-19. Those without symptoms will still be directed to test twice within 24 to 36 hours if their first test is negative. In addition, we submitted to the FDA to expand our age range across all of our EUAs to include children ages 2 to 14, in addition to our prior authorizations for ages 15 and up. Per FDA agreed-upon protocols, we conducted both pediatric-specific usability and clinical studies to ensure acceptability and performance in this population. We are now awaiting FDA review of this data. We also submitted for authorization of our new reporting app, InteliSwab Connect, which can be used by communities, schools, and businesses to record, save and report their results to public health. Finally, we conducted studies with live Delta and Lambda variants in two independent labs and detected both variants in addition to Alpha, Beta, and Gamma variants from prior studies. While we believe the preponderance of our InteliSwab revenues in fiscal year 2022 will be domestic, our long-range plan has increased contribution from international markets over time. In fiscal year 2022, we are planning to conduct studies to support the CE Mark for InteliSwab with a configuration most appropriate for countries outside the United States. Finally, we have continued to make progress in our manufacturing scale-up for InteliSwab, but are behind where we would hope to be from a test production standpoint. Despite the challenges we are facing, we continue to believe we are on track to generate approximately $30 million in total InteliSwab revenue for this year. We believe we’ve isolated the scale-up challenges to be primarily caused by variability in certain raw materials and processing steps, and we are currently working with vendors and third-party experts to achieve a resolution. Importantly, as we look to January of next year, we believe we are on track to scale to greater than 4 million InteliSwab tests per month, which is our current installed capacity, assuming resolution of the manufacturing process. However, given timelines to pack tests into finished OTC two-pack kits, our sales run rate will likely be below this level for the first quarter. We continue to anticipate being at annual production levels of approximately 8 million InteliSwab tests per month by June and are looking at more ways to rapidly scale and supply significant market demand that currently exists.

Thanks, Steve. I’m pleased to discuss our financial results for the third quarter and provide updates on our financial outlook. First, from a top-line perspective, we delivered total revenue of $53.9 million in the third quarter of 2021 compared to $48 million in the prior year, representing year-over-year growth of 12%. Excluding COVID-19 revenue, our core business grew 37% in the quarter to over $40 million, reflecting a continuation of the strong growth trends we saw last quarter. This quarter, we had record diagnostic revenue at $23.5 million versus $16.3 million in the previous year, reflecting 44% growth, driven primarily by InteliSwab. Our HIV business was relatively flat year-over-year for two reasons. First, the Bill & Melinda Gates Foundation subsidy for our international HIV self-test business expired in the second quarter, which negatively impacted revenue despite test volume growth on a year-over-year basis. Secondly, we continue to see logistical issues with shipping and with our NGO partners in Africa, which impacted international HIV sales as COVID-19 spiked in much of Africa and Asia this quarter. We anticipate some improvement on this front in the fourth quarter. In terms of domestic HIV testing, there was a recent publication with results from the center for disease control's take-home program, where our OraQuick HIV self-test was shipped directly to consumers. The study found that 37% of the high-risk consumers receiving a test had never been tested at all in the past and 56% had not been tested for HIV the last year. This data was very positively received and we are optimistic that it could lead to further utilization of home HIV self-testing. As a reminder, our OraQuick oral fluid HIV test is the only over-the-counter self-test for HIV in the United States and required significant studies to gain PMA approval. This quarter we also continued to see strong growth in our HCV and drugs-of-abuse testing businesses, based predominantly on a recovery and testing from the impact of the pandemic. Finally, we had stronger than anticipated InteliSwab revenue in the quarter of $7.7 million, predominantly based upon better than forecasted test pricing. As we stated last quarter, we have seen exceptionally strong customer demand for InteliSwab, and we can sell every test we can manufacture. Our performance depends on our ability to produce tests. As Steve mentioned earlier in the call, we are ramping production on a weekly basis, but remain constrained due to raw material variability and processing issues. For the year, we are anticipating approximately $30 million in InteliSwab revenue and our goal is to have our production capacity match our installed capacity early in the first quarter. Given demand levels, we are also evaluating ways to further accelerate our production capacity.

Thanks, Scott. Our goal all along is to emerge from the pandemic as a larger and faster-growing company. We strongly believe that the tailwind behind InteliSwab revenue is longer than most investors give us credit for and will facilitate significant growth investment in the organization in the coming years. We also see additional tangible benefits, such as growing our customer base, expanding our global reach into new markets, and demonstrating the significant clinical importance of effortless diagnostics that empower consumers and healthcare workers. Our expertise in this area positions us exceptionally well for the healthcare market of the future. With that, I’d like to turn the call back over to Scott for Q&A.

Thanks, Steve. Operator, we’re now ready to begin the Q&A portion of the call. We would ask that you limit your questions to one question and one follow-up to ensure broad participation.

Thank you. We’ll now begin the question-and-answer session.

Hi. This is Kevin on for Vijay. And thanks for taking the question. Looking at guidance for 4Q, the guide seems to imply a decline in base business growth, excluding COVID. Considering volumes and utilization are normalizing, what is causing the decline? And can you just walk us through the assumptions for 4Q guidance? Thank you.

Thanks for the question, Kevin. This is Scott. There are a couple of factors. When we look at the fourth quarter, those are really driving that sequential change in the core business. The first one is when we look at the molecular kits business, some of our larger and more consumer-focused customers there changed the timing of some of their ordering patterns, where they took more products in the third quarter. And so we would anticipate that that portion of the business being down in the fourth quarter. The second factor is just when you look at the COVID molecular collection kits, we are modeling that business being down sequentially. As I stated on the call, that’s potentially a conservative assumption given some of the conversations we’ve had with our customers, but we feel it’s prudent right now, just given what we know in terms of the outlook. So those are really the two factors outside of InteliSwab that are driving kind of the core piece downwards on a sequential basis.

Vijay, do you have another question?

No, that’s it. Thank you.

Okay, thank you. And our next question comes from Andrew Cooper from Raymond James. Your line is open.

Hey, guys. Thanks for the questions. Maybe first just thinking about sort of the capacity ramps and what’s going on there. Previously, we talked about technology transfer and now we’re hearing about some new things in terms of the incoming raw materials and the processing steps. So are these related, or are these kind of new challenges? And can you just give us a little bit more flavor for what these issues are and how you can go about resolving them and how quick that can actually occur?

Yes, certainly, Andrew, it’s Steve. These are not different problems than what we expressed after our call in August for the second quarter. What we’ve been doing is narrowing down the factors effectively, and that’s why we have expressed them today in terms of certain raw materials and processing steps. So we have successfully worked the list of potential issues down to a small number. And I think what you can read into this is, first of all, we’re not happy with the situation. We’re doing everything we can to resolve it as quickly as possible. Many people are working 24/7 on this. But obviously, when you leave $400 million in customer orders on the table and are not able to fulfill them, that is highly disappointing. So I want to say that upfront. Having said that, when we provided our guidance for the fourth quarter, $30 million in InteliSwab sales for 2021 and looked at the ramp to 4 million tests per month in the first quarter next year and then moving to 8 million tests per month by June, all that has built in expectations for the ramp up from here. So it’s not where it needs to be today, clearly, but I think we see the path forward from here. We understand the issues. We’ve gotten experts from our equipment manufacturers, additional expertise in engineering and lateral flow technology. So, we are on it. I think we’re very close to having this fully resolved in the near future.

No, Andrew, I think the only thing I would add to that is it’s important to understand that we are scaling on a weekly basis. It’s just not quite yet at the rate that we wanted to be at this point.

Understood. Understood. Okay. And then maybe as a related follow-up and then I’ll stop. Just as we think about the government contract in terms of the big purchase order and that volume or that capacity that you’re expecting to reach, it doesn’t necessarily leave a ton to try to – a ton of slack to hit the full $205 million purchase. How do we think about maybe the timing of the shipments there? And then what’s left to necessarily go out to the more kind of traditional market? How do we think about what the mix might look like from that perspective?

Yes, Andrew. So we receive orders from the government on a weekly basis and we’re working the product mix in real-time here. But I think we’ve shared previously, the preponderance of the government orders are going to be in 2022, so we’re just starting with them. The government has actually been very responsive to our need to supply commercial customers. Part of the $400 million in customer order demand that we cited in our call are not only driven by retailers like Walgreens and Walmarts, but there are large Fortune 500 employers who are buying in bulk for testing and programs, probably in anticipation of the Department of Labor and OSHA regulations, which will come on stream fairly soon. So I think we can work the product mix in a way that’s favorable to our bottom line and that’s a discussion we have with the government every week.

Okay, great. I’ll stop there. Thanks, again.

Thanks, Andrew.

Hey, guys. It’s Matt on for Brandon. I just want to add one on the M&A pipeline, Steven. You noted you’re evaluating a number of opportunities, especially in the area of next-gen diagnostics. I think you coined it effortless diagnostics. Just add a little more color on the pipeline today, if it’s a little bit more actionable than maybe it has been in the past. And then as we think about any potential deals, can you talk about more tuck-ins where you can build out the menu over time versus something that could be potentially more transformative? Thank you.

Yes. Certainly on that. So we’ve been talking about the deal flow for some time. And obviously, that changes depending on the circumstances and willing sellers, let me put it that way. Today, I think we’ve never seen a more robust pipeline than we have for the rest of the year. And you’re absolutely right, we have called out effortless diagnostics and next-generation platforms and that’s certainly an area we’re interested in. But they’re also, as you said, tuck-in opportunities like the deals that we’ve done over the past three years, CoreBiome, Diversigen, Novosanis, et cetera, UrSure. These are all companies that could have an impact in the three to five-year time period. But there are bigger deals out there that we’re looking at. And I think that our ability to transact has never been better given what the prospects are right now in the pipeline.

Steve, Scott, thanks for taking my questions. I wanted to start with the $400 million in orders you referenced. Give us a little bit more color on that, if you can. And specifically how much of that do you think is still up for grabs versus how much of that was maybe a function of the delta variant spiking and individuals rushing out to shore up their inventory in relation to that. So just maybe give us a little feel into the durability of that $400 million.

Yes, certainly, Frank. Thanks for the question. It’s hard to say how much of that $400 million we can convert because circumstances change over time. But I think you’re right in calling out the demand initially based on the delta variant. But I think also in the factors that matter, back to school and back to work programs are still underway today. And there’s been an endemic shortage of rapid antigen tests, not only from us but from other manufacturers as well. So we expect to convert some of that $400 million. We can’t say exactly how much. We kept in touch with these customers throughout this process and have tried to schedule when we can have capacity to meet their needs. And so we expect some of them to come back, probably not all of them to come back based on the circumstances. But the other thing which I think is very important is the use of rapid antigen tests is a new phenomenon for everybody. This is not something that people have been used to doing routinely, weekly, daily, whatever the case may be based on your exposure pattern to other people. But they’re starting to understand it, which I think is driving initial awareness and demand. And then as I mentioned previously, Department of Labor, OSHA requirements for testing in vaccination, I think will make clearer what the need is for anybody that’s convening people together, whether they’re employers or sports stadiums or concert venues, nursing homes, prisons, et cetera. We’ll have a tighter, I think, specification of what’s needed and the requirements for employers from there. So we’re very optimistic that there’s going to be reoccurring demand and that’s why we pointed to the durability of this opportunity for OraSure.

And then just a follow-up for Scott. I heard a lot of moving pieces in gross margins. I heard your comment about Q4 likely to be similar to Q3. Maybe give us a little sense to how gross margins you feel will look once we get through the different manufacturing and scale-up inefficiencies that we’re experiencing now, some goalposts would be fantastic if we can think about getting back to the 50% range or if it’s 40% range anything in that area would be great.

Frank, I think it’s important first off just to point out, we had a kind of a number of transitory factors this quarter, right? We cited the issues associated with the InteliSwab scale-up. We’re just not efficiently utilizing our overhead. We’re doing a lot of employee training as we get ready for manufacturing at higher levels. And so that was a major issue in the quarter. We also had the reserve of $1.8 million, which had a pretty significant impact on the margins this quarter. And then the other piece is the expiration of the Bill & Melinda Gates subsidy. I think when you look to next year and you think about our margin structure, when you think about the core business, the core business obviously depends on mix. But the core business, our gross margin structure currently is in the mid to high 50s. And then obviously, we have the InteliSwab component, which will be at a lower gross margin. And so hopefully, that gives you a little bit of granularity in terms of how to think about the overall margin structure next year.

And our next question comes from Vijay Kumar from Evercore.

Hey, guys. Thanks for taking my question. Steve, one, I just want to make sure I understand the Q4 base business trajectory. My math 2Q base revenues were $40 million, right? We had a total of $54 million with collection InteliSwab was about 14-ish. The guidance for Q4 implies a sequential step down from the $40 million for the base business? Look, historically, your Q4 revenues have been higher than 2Q and from everything that we’ve been hearing, utilization is getting back to normalcy post the disruption in the third quarter. Can you just talk about the base business sequential should be above or below the $40 million that we saw in 3Q?

Yes. Vijay, thanks for the question. I’ll state the top line and then Scott can give you detail. This is similar to a previous question, though. What’s driving that sequential step down in the fourth quarter in the base business is timing for our Genomics sector within Molecular Solutions. And so it’s saliva collection kits, primarily driven by consumer-based companies who change their buying behavior. You may recall historically that the fourth quarter is when they normally made their big buys; in this case, they made their big buys in the third quarter. So it was a timing issue primarily related around that particular issue.

Yes, Vijay. There’s been a couple of drivers there. The first one is really kind of related to product mix, as we look at some of the mix issues. Now, when we talk about core, we’re obviously also excluding the COVID collection kits, which are one of our highest gross margin businesses. The second piece that has driven some changes is the expiration of the Bill and Melinda Gates Foundation subsidy. And so when we look at our international business, the gross margins for that business are quite a bit lower than the overall gross margins. And then the third component is really tied to similar things that other companies are seeing in terms of shipping costs and labor costs that have obviously been on the rise. And so it’s really those three factors that have driven the changes that we’ve seen there.

Well, they’re not process-related changes. It’s the same process and bill of goods and processing steps that we’ve had from the EUA process on. So the challenge has been moving from more of a manual process to an automated process. And so that’s where – when and where the issues became apparent as we shared in August. And so we’ve been working diligently. So I want to be clear; there are not any new problems that have developed since we reported in August. In fact, we’ve narrowed our sights on the critical few involving raw materials and certain processing steps.

Understood. Thanks, guys.

Thank you, everyone, for participating in our call today and your continued interest in OraSure. We wish you a great afternoon and evening, wherever you are. Stay safe and be well.

Thank you, ladies and gentlemen. This concludes today’s question-and-answer session and conference call. Thank you for participating. You may now disconnect.