Good day, and thank you for standing by. Welcome to the OraSure Technologies Inc 2023 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Jason Plagman, Vice President of Investor Relations.

Good afternoon and welcome to OraSure Technologies third quarter 2023 earnings call. Participating in the call today for OTI are Carrie Eglinton Manner, our President and Chief Executive Officer; and Ken McGrath, our Chief Financial Officer. As a reminder, today’s webcast is being recorded, and the recording 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, shipments in 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 OTI’s SEC filings, including its registration statement, its annual report on Form 10-K for the year ended December 31, 2022, its quarterly reports on Form 10-Q, and its other SEC filings. Although forward-looking statements help to provide more complete information about future prospects, listeners should keep in mind that forward-looking statements are based solely on the information available to management as of today. OTI 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 Carrie.

Thank you, Jason and thanks to everyone for joining us today. We are pleased to provide an update on the progress OraSure is making on the three pillars of our strategic transformation. One, strengthening our foundation; two, elevating our core growth; and three accelerating profitable growth. A few notable highlights during the quarter include, we generated $37 million of operating cash flow in Q3 and grew our cash balance to $225 million. We continue to execute on our COVID-19 contract and we delivered stronger-than-anticipated NTELOS volumes during the quarter. And in September, we received an award for $5.7 million for future orders of IntelliCab COVID-19 test from the U.S. government as part of the reopening of COVIDtest.gov. We delivered core revenue growth of 7% on a year-over-year basis. We continue to unlock cost savings as part of our enterprise-wide focus on driving improved operating efficiency. And with our stronger balance sheet, we are investing in our internal innovation roadmap and evaluating external partnerships and investments to expand and strengthen our portfolio of assays and sample management solutions and services in order to accelerate our long-term growth. Starting with cost as we continue to strengthen our foundation, we remain highly focused on delivering greater operating efficiency, including reductions in our cost structure for both production and non-production related expenses. During the quarter, we successfully completed the final milestones included in our contract with the U.S. Department of Defense related to the completion of our automation capabilities and capacity expansion at our Opus Wave facility in Batam Pennsylvania. Additionally, we have already collected the final $24 million of milestone payments here in Q4. With this phase of the expansion completed, we expect to make further progress in consolidating our manufacturing footprint to drive additional efficiencies and cost savings. Over the last year we have made tremendous progress in establishing an enterprise-wide mindset that is focused on continuous improvement in operating efficiency. We expect to generate additional productivity enhancements over the coming years including further leveraging our automation capabilities, consolidating facilities and controlling our non-production costs. These initiatives give us confidence that we will achieve our target of operating cash flow breakeven for our core business by the end of 2024. Moving to COVID-19, our Intelliflo volumes were stronger than expected generating $50 million in revenue in Q3. Our relationship with the U.S. Department of Health and Human Services continues to be positive. We have good visibility to order trends that could complete the remaining portion of our existing contracts during the first half of 2024. Additionally, as I mentioned earlier in September we received an award for $5.7 million for future purchase orders from the U.S. government for COVID tests that are available for free to households across the U.S. as part of the reopening of COVIDtest.gov. And on the product side, the U.S. FDA approved the shelf life extension of IntelliSwab from 18 to 24 months in September. Looking at our core business which excludes COVID-related products, total core revenue in Q3 grew 7% on a year-over-year basis. In our HIV franchise, the Together Take Me Home program continues to demonstrate strong traction in expanding access to HIV testing to at-risk and underserved populations. We look forward to continuing to collaborate with our partners as we enter the second year of this important 5-year initiative. We believe the positive outcomes from this program could create additional opportunities for our infectious disease business. Our differentiated HIV product also continues to resonate in international markets, contributing 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 C 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. Additionally, in our substance abuse testing portfolio, we are pleased to announce the expansion of our point-of-care toxicology offerings through a distribution agreement with the manufacturer of these devices. This agreement allows us to leverage our sales team and channel presence and expand our services in the substance abuse testing market. As part of this agreement, we will add several oral toxicity panels covering a range of drugs including THC, opiates, and amphetamine. Shifting to molecular, we continue to see signs of stabilization in our sample management solutions, despite softness in some end segments that we've discussed previously. We are seeing positive momentum in establishing new partnerships and commercial relationships as well as extending existing relationships. As an example, we are pleased to announce a multi-year extension of our relationship with Ambry Genetics. Ambry will be using our Oragene Dx device for a variety of testing related to hereditary cancer, rare hereditary diseases, reproductive health, and pediatric disorders. As we continue to expand and diversify our customer base, we're also proud to share the recent success we've delivered in the Companion Animal segment. Our PERFORMAgene product has been selected as the sample collection device for new canine health offerings that are being launched by two leaders in the space. Overall, we continue to make progress on our initiatives to accelerate profitable growth through investments organically and inorganically, including external investments and potential acquisitions. Our strong balance sheet and positive cash flow generation are key differentiators in the current market and economic landscape. We believe that these factors, as well as our strong client and channel relationships, our track record of execution and consistent delivery for our customers, plus our experience navigating complex regulatory approval processes, positions OTI to be the partner of choice to help power precision health into the future. With that, I'd like to turn the call over to Ken, to discuss our financial results and guidance.

Thanks, Carrie. I'm happy to discuss our results for the third quarter of 2023 and provide updates on our financial outlook. In Q3, we delivered total revenue of $89.2 million. COVID-19 products predominantly IntelliSwab contributed $50.2 million of revenue in the third quarter. Purchasing patterns under our contract with the U.S. federal government were stronger than expected during the quarter. Total core revenue, which excludes COVID-19 products, was $39 million in the third quarter, representing 7% year-over-year growth. Within core revenue, our diagnostics products generated $19.6 million of revenue in Q3 and grew 59% year-over-year. Looking at our molecular sample management products, revenue in the third quarter of $15.2 million decreased 4% on a year-over-year basis but increased 17% sequentially, which was in line with our expectations. We continue to see muted purchasing patterns from a few large customers during the quarter. That said, we are also seeing some signs of stabilization with current customers, as well as opportunities in new areas, as Carrie discussed. From a gross margin perspective, our GAAP gross margin in the third quarter was 49.7%. Non-GAAP gross margin was 50% in the third quarter due to improved operating efficiencies including lower manufacturing scrap expense. Looking ahead to the fourth quarter, we expect gross margin to moderate back to the mid-40% range due to product mix shifts, including the anticipated reduction in IntelliSwab volumes. As a reminder, we have expanded our gross margin from the high 30% range at the beginning of 2022 to the mid-40s in 2023, and we believe we can drive additional margin expansion over the coming years. We remain focused on delivering efficiencies across our enterprise, including consolidating sites, standardizing products, driving procurement savings, and further leveraging our automation capabilities at our Opus Way facility. Shifting to operating expenses, our GAAP operating expenses in the quarter were $33.4 million, which includes $6.2 million for impairment of acquired intangible assets. Our non-GAAP operating expenses were $24 million in Q3. The sequential decline in non-GAAP operating expenses was primarily due to a significant decrease in external legal fees. We continue to focus on driving additional efficiencies in our non-production expenses in the coming quarters. These cost savings are important as we look to utilize our cash to invest in growth and in our goal to achieve operating cash flow breakeven in our core business by the end of 2024. Our GAAP operating income was $10.9 million in Q3, which is up from $0.9 million in the year-ago quarter. Non-GAAP operating income was $20.6 million in Q3, which is an increase from $11.7 million in Q3 2022. We ended the quarter with zero debt and total cash, cash equivalents, and short-term investments of $225 million, which is up from $186 million last quarter. The increase in our cash balance during Q3 was primarily driven by $37 million of operating cash flow, including a reduction in our inventory levels. We also received $6.5 million in Q3 related to the achievement of milestones at our Opus Way facility. Furthermore, during Q4, we collected the final $24 million in milestone payments related to this project. Turning to guidance, we are guiding to fourth quarter revenue of $71 million to $76 million, which includes IntelliSwab revenue of $38 million to $41 million. We expect Q4 core revenue of $33 million to $35 million, and the midpoint implies core revenue is approximately flat on a year-over-year basis. Finally, as part of our ongoing focus on enterprise-wide operating efficiency, we are on track to exceed the $15 million of annualized cost savings announced in Q1 2023.

Thanks, Ken. During the third quarter, we delivered significant progress on our strategic imperatives. We continued to strengthen our foundation through strong cash flow generation and improved operational efficiency. We delivered some examples of our plan to expand the portfolio of tests that our sales team can provide to our clients, and we completed the final milestones included in our contract with the U.S. Department of Defense related to our capacity expansion at our Opus Wave facility. Overall, we are confident OraSure is well-positioned to execute on our vision of transforming health through actionable insights, powering the shift that connects people to healthcare wherever they are. Our mission of improving access quality and value of healthcare with innovation in effortless tests, sample management solutions and services is aligned with where healthcare is headed in the U.S. and globally over the coming years. With that, I'm pleased to turn the call over to the operator for Q&A.

Thank you, Carrie. At this time, we will conduct the question-and-answer session. Our first question comes from the line of Jacob Johnson with Stephens. Your line is open.

Hi. Good afternoon. Congrats on a nice quarter. Maybe Ken, just on the gross margin line that was a big standout in the quarter, seems like from your comment mix was a benefit this quarter which we shouldn't assume in Q4. But could you just discuss kind of gross margins on an ex-COVID basis how much improvement you've seen in the ex-COVID gross margin?

Thank you, Jacob. As we've mentioned before, we are seeing improvements excluding COVID, particularly in utilizing our operational expertise. Specifically, we have made progress in two areas. First, we are continuing to consolidate our facilities and make better use of the overhead from our existing Opus Way facility. Second, we are focusing on automation and applying that across our other product lines. Additionally, we have been able to standardize our products, allowing us to incorporate some of the packaging enhancements and innovations we've developed with our IntelliSwab product into our other offerings. We've also achieved significant reductions in our scrap levels consistently.

Got it. That's helpful. And then maybe Ken, I'll just stick with you for my follow-up. Just the guidance implies, I think a $5 million sequential decline in the base business in the fourth quarter. Is that just seasonality? Or is there anything else you'd call out there?

Yeah. I think you could probably lump it mostly into seasonality, in particular in our international diagnostics. It's really the timing of our donor funding, just a difference in timing from previous years. Some timing in our molecular products related to some of our larger customers in the purchasing patterns.

Okay. That's helpful. I leave it there. Thanks for taking my questions.

Thank you.

Please standby for the next question. The next question comes from Casey Woodring with JPMorgan. Your line is open.

Great. Thank you. Thanks for taking my questions. So just on IntelliSwab, you said that there was more government contract revenue in Q3 than you expected. I guess of that $70 million line of sight you had in the back half, how much of that was in Q3? How much is contemplated in Q4 for IntelliSwab? And then, I think you mentioned that you have a line of sight for government revenue for the first half of next year. Can you just help us kind of frame how we should think about the IntelliSwab run rate for 2024?

Yeah. I'll share some of the numbers that we've shared in the past and where we are today. In the past, I think we shared the last quarter that we had about 26 million units left on the main contract with HHS for IntelliSwab. The price point is about $5. That's the remaining amount, and we have confidence that the government would purchase the total amount there. From the $50 million of COVID revenue in Q3 at $5, you can apply about $10 million of those units were consumed in Q3. That leaves about $16 million left. Our guidance is roughly about $40 million, or so, $38 million, and $40 million in Q4. So that's another $8 million in Q4, which would leave the remaining $8 million related to that one contract in 2024, which we expect to realize over the first half of the year. And that does not include the additional revenue that Carrie mentioned in dollars now recording dollars of $5.7 million of the additional contract from the government that we received this past couple of months.

Got it. That's really helpful. I wanted to touch on molecular services. I think that business declined 38% sequentially and 57% year-over-year. Can you just walk us through expectations there for Q4? I would imagine that business is being impacted on from macro and funding-related headwinds there. So has that stabilized at all? Do you expect to further step down? What are the trends in that business?

Yes, Casey, I'll start. On molecular services, this is a business that was very impacted by COVID. This is microbiome sequencing services. We think it's a super interesting part of Precision Health, but still very nascent. During COVID, what I think everybody experienced was a real sort of delay in funding and pause on funding. What we're looking for, and I think which everybody else is too, are those green shoots of return. We do have some large customers doing really strong work. But I'd say we don't see the full recovery in that yet. We don't know if it's the bottom, but we all hope it is. We believe in the recovery of it, and we think it's an interesting part of Precision Health, but it's one of the most impacted that we're all looking for a return on investment in the space both academically and otherwise. I think that's probably kind of the color on it, but we're looking for that return just like everybody else.

There is some lumpiness related to certain clients. But yes, that's the going forward.

Okay. And then just the last question for me just sticking with the molecular side. In the past, Q4 has seasonally been your strongest quarter given the consumer genomics holiday season benefit. I understand you guys have sort of flattened those contracts out over the years. So just kind of curious on that kind of customer lumpiness. It sounds like there's still some seasonality in that business reflected in the Q4 guide. So I just want to see if that's the case. What the kind of fluctuation there is with some of those larger customer orders? And then what the right run rate is for that business in 2024, if you have any color there?

We are not ready to provide guidance for 2024 at this moment, but I believe your understanding is correct. We experienced some variability in the third quarter due to certain customer orders. This variability is influencing our guidance for the fourth quarter in that specific area.

The only color I would add is I'd say we're less dependent on the few large customers. If there's any silver lining, it's that we're having to add new customers to fill that softness. We believe in genomic sequencing in segments. There are many players to look at how that market is recovering. Microbiome and sequencing services are showing some green shoots there, and we're excited about adding new customers to fill what was softness in a number of very large customers.

Great. Thank you for taking my questions.

Thanks.

One moment for our next question. The next question comes from Brandon Couillard with Jefferies. Your line is now open.

Hi, Brandon.

It's Matt on for Brandon. Thanks for taking the questions. On the base business, nice growth here in the quarter. It looks like the midpoint of the guide kind of calls for flat growth. I appreciate you're not guiding for next year, but do you expect that the core business could grow in 2024? What are some of the key drivers behind that? And then the three new infectious disease tests you talked about launching, can those be meaningful contributors to the business next year?

Thanks, Brandon. The base business, when you include our guidance for Q4, is about 2% year-over-year growth. We see 2024 kind of in that low single-digits range where we're working to improve on that. Partnerships like the distribution agreements we’ve announced, adding more tests into that portfolio near-term, would create a moderate impact, but I wouldn't call that a material change for next year. We’re working to expand our portfolio in the core and plug into that core in order to accelerate profitable growth. But I'd say this year’s 2%, while we aren’t providing 2024 guidance yet, it's right to think about in that low single-digit range but increasing.

Thanks. It's helpful. And then Ken, could you provide any color on what the core business has been tracking in terms of the free cash flow either in Q3 or what they'll do this year kind of year-to-date? Just trying to get some clarity on the bridge where we think about where we are today for that business and getting to breakeven by the end of 2024? Maybe just talk about some of the progress you made this year on closing the gap between burn and break-even.

We are making progress and remain confident that our core business will reach breakeven in cash flow from operations by the end of 2024. In Q1, we aimed for $15 million in cost savings, which we have surpassed, and we see further opportunities for cost reductions. We ended the quarter with $225 million in cash and expect favorable conditions in Q4 to increase that amount. We've collected $24 million in Q4 from the Department of Defense contract, and we anticipate generating positive cash flow this quarter with additional support from our inventory and accounts receivable.

Great. Thank you.

Thanks, Brandon.

The next question comes from Vijay Kumar with Evercore ISI. Your line is now open.

Hi. This is Alexandra on for Vijay. I just have two quick ones. On that new HHS contract, is this going to be at that same $5 ASP as we've been seeing this past quarter? And is there any more color you could give on the further cost actions and when we can expect to see those showing up?

Hi, Alexandra. I'll start with the HHS contract; it's in the $3 range. Our last two RFPs with the government have been in that range, as have the 12 awards we received, and the latest are all really in that range.

On the cost actions, the areas that we're focused on are facility consolidations, leveraging our Opus Way facility, really bringing down the overhead by putting more volume into that facility. We're also focused on reducing our scrap, which we've made a lot of progress on in the last 1.5 years or so, as well as automation, where we want to leverage all of the learnings we had from doing IntelliSwab devices at scale. One of the learnings was automation and applying that to our other product lines, as well as looking at some other operational efficiency opportunities related to product standardization and packaging improvements.

Additionally, we are using Lean Six Sigma methodology, training people, and having rigorous key performance indicators for the accountable execution we talk about both leading and lagging indicators across the organization to drive that rigor. These types of frameworks give us confidence in delivering our commitment on breakeven from an operating cash flow perspective for the core by the end of next year.

Great. Thanks.

Thanks, Alexandra.

One moment for our next question. The next question comes from Andrew Cooper at Raymond James. Your line is now open.

Hi, everybody. Thanks for the question.

Hi, Andrew.

Maybe first just kind of a longer-term question. If we look back historically, there's always been a pretty big gap on the gross margin side between the molecular business and the diagnostics business. I guess when we think about bringing everything into Opus Way and lower growth in molecular than maybe where it was at peak. All these things are coming together post-COVID; has that gap changed in the near term for the core? And then longer-term how should we think about the different components of this portfolio from a margin perspective?

Thank you for the question. We're not guiding longer term on margins, but what we are looking at is probably kind of normalizing back down to the mid-40s. Everything you described is the correct thesis. We are trying to leverage our Opus Way facility and drive overall efficiencies. We're driving our diagnostic margins higher. The dynamic that was the biggest mix impact over the last year or so was on IntelliSwab, which started out lower than our average gross margins and has improved significantly to a point where it's much higher than our overall margins. What we will look at doing is driving the overall improvement in our gross margins again through operational efficiency items I mentioned before to elevate the overall portfolio, leveraging our facility, automation, and standardization of our products and processes.

Okay. That is helpful. Maybe just one on capital deployment as the cash balance continues to rise here. Just what you're seeing out there in the environment how we think about maybe what's coming across the desk and the discipline you've shown. But when you make all the trigger and maybe if there's any change to what the right assets look like as the environment continues to evolve?

I'll start, and then I'll let Ken address capital deployment more specifically. But in the excitement of innovation and investments, that's where we think about the long-term of this business first and foremost. We put together a transformation plan that started with strengthening the foundation to give us this opportunity to think about investing for the long term. That's where we start. Internally, we are taking our time. We're being incredibly diligent, and I'd say based on the market and economic landscape, the strength of our balance sheet is giving us a vantage point to think about everything externally that's coming across and investing in our organic capabilities, building on strong portfolios in both diagnostics and molecular sample management solutions.

Sure. To build on what Carrie mentioned, we currently have $225 million in cash, and we expect this to grow due to the positive factors I referred to earlier. We likely need to retain around $60 million to $80 million to manage our annual operating expenses, being quite conservative in that estimate. This provides us with flexibility. We are interested in exploring partnerships and will be careful in our selections. Any partnerships we pursue need to hold significant potential for future growth.

Our strengths can act as an accelerator together with potential partnerships. So there's a lot to consider, and we’re being thoughtful about the choices we make.

Great. I will stop there. Thanks for the question.

Great. Thanks, Andrew.

One moment for our next question. The next question comes from Patrick Donnelly of Citi. Patrick, your line is now open.

Hi. This is Brendan on for Patrick. Just one quick one for me. Last earnings call, you guys highlighted infectious disease, respiratory, and sexual health as possible areas to extend to. So I wonder if there are any updates on those areas or any new areas that you have in the pipeline that may become revenue-generating in the next few quarters or years?

Yes. In terms of the strategy around building on our strong infectious disease and sexual health portfolio, that's exactly what we're plugging into with the first partnership agreement for international segments, which includes Syphilis. Both U.S. and international are a focus. The partnership we've announced is for international distribution. Syphilis is one of the fastest-growing STIs and fits well within our HIV and HCV portfolio, as well as an international HCV test and hep B test. While we are not providing guidance for 2024, I would say the launch of distribution you expect to ramp up; I wouldn't call that in the next few quarters, but rather it aligns with our strategy over the coming years.

Great. Thank you.

Thanks, Patrick.

This concludes the question-and-answer session. I would now like to turn it back over to President and CEO, Carrie Eglinton Manner.

Thank you so much and thank you to everybody for joining. We appreciate your interest in OTI and look forward to our ongoing conversations. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.