Earnings Call Transcript - OSUR Q1 2024

Operator, Operator

Good day, and thank you for standing by. Welcome to the OraSure Technologies First Quarter 2024 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Jason Plagman, Vice President of Investor Relations. Please go ahead.

Jason Plagman, Vice President of Investor Relations

Good afternoon, and welcome to OraSure Technologies' First Quarter 2024 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, performance, shipments, end markets, business plans, regulatory filings and approvals, expectations and strategies. Actual results could be significantly different. Factors that could affect results are more fully discussed in OTI's SEC filings, including its registration statements in the annual report on Form 10-K for the year ended December 31, 2023 or 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 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.

Carrie Eglinton Manner, President and CEO

Thanks, Jason, and thank you 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. And before I talk about the quarter, I just want to frame what's strengthening our foundation, elevating our core growth and accelerating profitable growth look like in our business. Strengthening is our organizational restructuring and cost rebalancing that has improved our balance sheet and cash flow generation. Elevating is the focus on our core capabilities and leveraging these strengths internally and in strategic partnerships to expand our product portfolio and the market segments we serve. Accelerating is about investing for profitable mid- and long-term growth while our end segments rebuild momentum. A few notable highlights during the first quarter include, we delivered Q1 revenue that exceeded our guidance ranges for both core revenue and COVID-19 products. As part of strengthening our foundation and our enterprise-wide focus on operational efficiency, we are taking next steps to streamline our operations, including insourcing third-party manufacturing activities into our Bethlehem facilities, exiting our microbiome laboratory and analytical sequencing services business known as Diversigen, and consolidating our Novosanis site in Belgium into other locations. These initiatives are expected to result in significant cost savings over the next 2 years and are important steps to align around our strengths, rightsize our cost structure and achieve our target to breakeven in operating cash flow from our core business by the end of 2024. Next, our strategic partnerships with Sapphiros and Diagnostics Direct that we announced earlier this year are off to a strong start. And with our healthy balance sheet, we are investing in our innovation roadmap and partnerships to leverage our existing strengths in order to position OTI for profitable growth. Starting with operating efficiency, we continue to strengthen our foundation. As we've discussed over the last 18 months, we have made tremendous progress in improving our operating efficiency, streamlining our footprint and establishing an enterprise-wide mindset that delivers continuous improvement. As part of these efforts, we are taking additional steps to rebalance our cost structure and position OTI for long-term success. First, we initiated steps to wind down Diversigen by the end of the third quarter. OTI acquired Diversigen and CoreBiome in 2019 based on the potential of the microbiome sequencing services market. Despite early success, the COVID-19 pandemic and other external market factors have negatively impacted the microbiome segment, and we have experienced a decline in services revenue while lacking line of sight to meaningful near-term growth in this segment. Given our limited visibility to scaling the business profitably and prioritization of our other core strengths, we have decided to exit the microbiome sequencing services business. We are focused on providing continuity for our clients and transitioning them to a leader in the space. Plus, it's important to note, we will continue to participate in and serve the segment with our DNA Genotek microbiome sample management kits and our distribution of Anaerobe systems collection offerings. Second, we commenced projects to insource production of certain sample management products from external contract manufacturers in Canada into our manufacturing center of excellence in Bethlehem, Pennsylvania over the next 18 months. Insourcing these activities is expected to improve our operating efficiency and further leverage our existing capabilities and infrastructure. Third, we are planning to exit our Novosanis site in Belgium by the end of this year and integrate those activities into our existing infrastructure. We will continue to develop and sell the Colli-Pee urine collection device as part of our sample management solutions. In total, these actions are expected to result in more than $15 million of incremental annual expense reductions following completion, and they are important steps in achieving our targets to breakeven in operating cash flow from our core business by the end of 2024. Moving to COVID-19. InteliSwab generated $23 million of revenue in Q1. As we discussed last quarter, we have visibility to order trends that are expected to fulfill the remaining portion of our largest InteliSwab contract with the U.S. government during Q2. Moving to our core business, which excludes COVID-related products. Q1 core revenue of $31 million was at the high end of our guidance range. Performance in both core diagnostics and core molecular sample management markets is consistent with the outlook embedded in our guidance. Within our Diagnostics business, March 2024 wrapped up the initial 12-month period for the Together Take Me Home Program, which includes HIV at-home test kit distribution. As you may remember, Together Take Me Home is a collaborative effort across the private and public sector, with the goal to provide free HIV test kits in all 50 states and Puerto Rico. Initial plans were to distribute 200,000 test kits per year during the 5-year program for a total of 1 million tests deployed. However, the demand for tests has far exceeded expectations. According to data collected by the program, 27% of orders were from people who reported they had never tested for HIV before. The program's success demonstrates how reducing barriers to care empowers individuals to learn about their health, combat stigma and positively impact access to HIV testing prevention and care services. We are proud to play a role in this important program and look forward to a successful second year. Since our last call, we successfully launched the sales and distribution partnerships that we announced previously. We delivered our first sets of orders for Diagnostics Direct syphilis healthcare tests and for Anaerobe System biome preserve, amongst others. These launches demonstrate how partnerships allow us to enter new market segments, expand the portfolio of comprehensive products we can provide to our customers and leverage our existing capabilities. Shifting to molecular sample management solutions. The market environment remains muted as the industry emerges under the post-COVID environment. In addition to factors such as regulatory uncertainty for diagnostic labs, evolving research priorities and funding environments for life sciences and academic organizations, and a few customers working through short-term uncertainty related to corporate structures. Even with these near-term headwinds, however, we remain confident in the mid- and longer-term opportunities for our sample management solutions while we continue to reinforce our market leadership position. As our end segments begin to recover, we are confident in our position as an industry-leading provider of sample management solutions for several reasons. We continue to demonstrate the quality and consistency of our sample management solutions, including our 510(k) cleared collection and stabilization devices in several categories. Also, we believe our track record of collaborating with our partners and successfully navigating complex regulatory approval processes will become even more important for diagnostic labs as they contemplate FDA regulation of LDTs. And we have developed very strong customer relationships as a result of our consistent execution, reliability, and our experienced sales team. We continue to reinforce our leadership position by onboarding new customers as well across multiple segments, including clinical reference labs, biopharma companies, global research as well as nonhuman segments. While the orders from these customers represent a small percentage of our revenue today, they represent future growth opportunities as their offering scale and their discovery work progresses. In addition to onboarding new customers, we are proud to hold long-standing relationships with the pioneers and innovators in the genetic testing space. On this note, we are pleased to share that we've recently signed a multiyear deal with 23andMe to continue to provide our 510(k) FDA-cleared Oragene collection device to be used in their health and ancestry services. 23andMe provides individuals with genetic insights and tools to empower them to take action on their health. From an innovation standpoint, we continue to make investments in our product pipeline and evaluate potential investments that can accelerate our growth. This includes both internal and inorganic opportunities through strategic partnerships and potential acquisitions. Our strong balance sheet and positive cash flow generation continue to be important differentiators in the current market and economic environment as we look for opportunities to accelerate our growth and profitably scale our business. Before I conclude, I'd like to highlight that we recently published our 2023 to 2024, OraSure Cares, ESG report on our Investor Relations website. This report highlights our progress in advancing sustainability and governance-related initiatives that are meaningful to our internal and external stakeholders and our efforts to create value for our customers, employees, shareholders, and the global communities that we serve. With that, I'd like to turn our call over to Ken to discuss our financial results and guidance.

Kenneth McGrath, Chief Financial Officer

Thanks, Carrie. I'm happy to discuss our results for the first quarter of 2024 and provide updates on our financial outlook. In Q1, we delivered total revenue of $54.1 million. Core revenue, which excludes COVID-19 products, was $31 million in the first quarter. Within core revenue, our diagnostic products generated $16.4 million of revenue in Q1 and decreased 4% year-over-year. Looking at molecular sample management solutions. Revenue in the first quarter of $10.8 million decreased 16% on a year-over-year basis, which was consistent with the expectations embedded in our guidance range. COVID-19 products, predominantly in InteliSwab contributed $23.1 million of revenue in the first quarter. Purchasing patterns under our contract with the U.S. government are slightly stronger than forecasted. We expect to fulfill the remaining $17 million of our largest contract with the U.S. government during the second quarter. From a gross margin perspective, our GAAP gross margin in the first quarter was 44.5%. Non-GAAP gross margin was 45.2% in the quarter, which was consistent with our expectations. While we anticipate some quarterly fluctuations in gross margin percentage during 2024 related to the timing of the restructuring initiatives we've discussed and the tapering of InteliSwab volumes, we continue to believe we can drive additional gross margin expansion over the coming years. And we remain focused on delivering efficiencies across our enterprise, including consolidating facilities, driving procurement savings and further leveraging our automation capabilities. Shifting to our operating expenses: our GAAP operating expenses in the quarter were $31.2 million, which includes $2.8 million of noncash stock compensation expense, $3.3 million for impairment of assets related to Diversigen and Novosanis and $173,000 for reduction in workforce severance. Our GAAP operating loss in Q1 was $7.1 million and non-GAAP operating loss was $300,000. As Carrie discussed, as part of our transformation journey, we initiated several additional actions to rebalance our cost structure, consolidate our operational footprint and streamline our portfolio of offerings while we focus on our strengths. To that end, we plan to wind down and exit Diversigen by the end of the third quarter. This business, which comprises our molecular services offering generated $4 million of revenue over the last 12 months, a decline from the prior 2 years. From a cost savings perspective, our exit from the microbiome sequencing services business is expected to reduce our annualized expenses by approximately $10 million, which includes both cost of goods sold and operating expenses. In our Sample Management Solutions business, we are insourcing manufacturing of certain products into our Bethlehem facilities. We expect to transition production for a majority of the volume by the end of 2024 with the remainder in 2025. Insourcing these activities is expected to result in approximately $5 million of annualized cost savings upon completion of the transition. Additionally, we initiated steps to close our Novosanis site in Belgium by the end of 2024 and integrate those activities into our teams in the U.S. and Canada. In total, these three initiatives are expected to result in more than $15 million of incremental annual expense reductions following completion, which is an important step in our plan to achieve our target to breakeven in operating cash flow from our core business by the end of 2024. These actions are in addition to our ongoing enterprise-wide focus on operational efficiency and continuous improvement. Moving to our balance sheet. We ended the first quarter with 0 debt and total cash, cash equivalents and short-term investments of $264 million. During the quarter, we generated $7 million of operating cash flow and we deployed $28 million for our investment in Sapphiros. Turning to guidance. We are guiding to second quarter revenue of $50 million to $55 million which includes core revenue of $33 million to $36 million and InteliSwab revenue of $17 million to $19 million. Our Q2 guidance includes $650,000 of revenue from the molecular service business that we plan to exit. Looking ahead to the second half of the year, we expect slight sequential improvement in core revenue in Q3 and Q4 compared to our Q2 outlook. This view is influenced by several factors, including our expectation for de minimis revenue contributions from the Diversigen molecular services business after the second quarter and a muted pace of recovery in genomics and other omic segments, consistent with the current market environment. With that, I'll turn the call back to Carrie to conclude.

Carrie Eglinton Manner, President and CEO

Thanks, Ken. As we detailed today, we are taking important steps to continue to strengthen our foundation by rightsizing our cost structure, streamlining our operations into our centers of excellence, and focusing our investments in areas that leverage our existing strength to accelerate our core growth in the mid- to long term. Overall, we are confident that OTI is well positioned to execute on our vision of transforming health through actionable insights, powering the ship that connects people to healthcare wherever they are. And our mission of improving access, quality, and value of healthcare with innovation and effortless tests and sample management solutions 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 back over to the operator for Q&A.

Operator, Operator

Our first question comes from Jordan Adler with Evercore ISI.

Jordan Adler, Analyst

Maybe for the first one, you guys have mentioned the strengthening of your balance sheet as a priority. Can you talk to some of the opportunities that you've been targeting, whether it be for partnerships and/or inorganic opportunity?

Carrie Eglinton Manner, President and CEO

Yes. We have announced 7 partnerships, Jordan, that I know you're aware of, but that we're really excited about. So we've talked every quarter about this journey and I love that you asked about it. But starting with that strength in the foundation, the point really is to position us for investing in the future. That's internal and as I just reiterated, the sort of strategic partnerships that we've talked about with Sapphiros that span our portfolios with Diagnostics Direct that launches and allows us to enter the U.S. syphilis testing market and other opportunities. We have five others. I won't list them all, but opportunities like that that allow us to plug directly into our strength today, our strong commercial team, the great customer relationships we have and provide a more comprehensive product offering. So we are very interested in the M&A opportunities, but we think partnerships are a really good way to create that momentum and build on the success that works while being very open, we're investing internally, but also being very open to other M&A that makes sense for our business.

Jordan Adler, Analyst

Understood. And maybe one quick follow-up. You mentioned the restructuring initiatives that are expected to result in a $15 million of annualized expense reduction. You also mentioned some additional operational efficiencies that you're looking to utilize over the course of the midterm to longer term. Can you talk about some of the additional levers that you have left to pull following these three actions that you mentioned this quarter?

Carrie Eglinton Manner, President and CEO

Yes, definitely. The site consolidations you're hearing about are part of our efforts to bring our facilities into our centers of excellence, and this includes insourcing third-party manufacturing. We're also seeing operational efficiencies from automation capabilities that we developed during COVID at our government-funded Opus Way facility, which can be applied to other platforms. We discussed site consolidation and mentioned our progress with automation. Another significant initiative involves repackaging and redesigning for smaller packaging. Last year, we announced substantial gross margin improvements for our InteliSwab product, and we are applying similar changes to our HIV product line as well. These operational efficiencies stem from site consolidation, and we aim to extend these capabilities across our entire portfolio. Although we’ve only received two questions this time, I want to stress that we are fostering a process improvement culture throughout the business. We've implemented a Lean Six Sigma methodology and trained over 100 employees as white belts, ensuring that every function has expertise in process improvements. We are taking a comprehensive approach to plan for the future and invest in long-term innovation.

Operator, Operator

Our next question comes from the line of Jacob Johnson with Stephens Inc.

Unknown Analyst, Analyst

This is Mac on for Jacob. Just a few quick ones for me as well. With regards to the wind down of Diversigen, it appears this is mainly a cost decision. But can you discuss why this offering was no longer strategic, and will it have an impact on anything else within the broader portfolio?

Carrie Eglinton Manner, President and CEO

We were excited about acquiring Diversigen and CoreBiome five years ago due to the potential of microbiome technology. Initially, we saw strong revenue growth, but COVID created significant challenges for the microbiome industry, hindering our ability to scale our sequencing services effectively. Our core competency lies in diagnostic devices and sample management collection devices, and the current scale of our sequencing services was resulting in substantial losses. As the path to profitability appeared distant, we decided to refocus on our core strengths. This means that while we continue to develop microbiome kits as part of our sample management strategy, we believe winding down sequencing services will not negatively impact other areas of the business. Instead, this shift will allow us to reinvest in stronger aspects of our operations, including microbiome kits, while reallocating savings away from the unprofitable sequencing services.

Unknown Analyst, Analyst

I appreciate the insight. Considering all the current factors in the portfolio and your growth expectations for the end of the year, how should we view cash flow trends as you finish winding down inventories and accounts receivable?

Kenneth McGrath, Chief Financial Officer

We previously indicated that we believe there is potential for increased cash flow related to our accounts receivable and inventory. We experienced some of that in the first quarter, and we anticipate continued improvement. We expect our inventory and accounts receivable to maintain a range of 30% to 35% in terms of cash flow in the future. Additionally, our objective is to achieve breakeven cash flow from operations within our core business. This positions us well financially, allowing us to consider any investment opportunities, both internal and external, for growth as Carrie mentioned.

Operator, Operator

I'm currently showing no further questions at this time. I'd like to turn the call back over to Carrie Eglinton Manner for closing remarks.

Carrie Eglinton Manner, President and CEO

Thank you. Thank you to everyone for joining, for your interest, and we look forward to our follow-up. With that, we'll close.

Operator, Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.