Earnings Call Transcript - OSUR Q1 2023

Operator, Operator

Good day, and thank you for standing by. Welcome to the OraSure Technologies Earnings Conference Call. At this time, participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would like to hand the conference over to Scott Gleason, Head of Investor Relations. Please go ahead.

Scott Gleason, SVP of Investor Relations and Communications

Thanks, Amanda, and good afternoon. Welcome to OraSure’s first quarter 2023 earnings call. I'm Scott Gleason, the SVP of Investor Relations and Communications. Presenting with me today for OraSure is Carrie 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 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 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 complete information about our 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 Carrie.

Carrie Manner, President and CEO

Thanks, Scott, and thank you to everyone for joining us today. We are pleased to report on the progress we continue to make in our strategic transformation, beginning with strengthening our foundation for growth, allowing us to elevate our core growth, and then to accelerate profitable growth. This quarter, we strengthened our foundation and bolstered our cash position with meaningful potential to unlock working capital moving forward. We saved on costs, we delivered on COVID-19 with record IntelliSwab volumes, and we completed our business unit integration while culturally reinforcing our mantra: innovating and operating with disciplined execution and accountability. We also grew sequentially in our core. Equally important, we are focusing on our innovation roadmap with organic and inorganic opportunities, including strategic partnerships, which we believe can provide fuel for growth. Starting with the detail on our cost savings, we implemented headcount reductions in February. Those affected 11% of our non-production workforce as we had previously shared with you. In addition, IntelliSwab volumes began to taper in Q2, and we have taken further steps to reduce our cost structure, starting with manufacturing and operational headcount. As a part of these changes, we're shutting down manual assembly operations overseas for IntelliSwab to fully leverage our automation capabilities that we've built in the US. We will continue to align our cost structure with COVID-19 demand and deliver additional cost savings as we work to achieve breakeven in cash flow from operations in 2024. Furthermore, to improve gross margins via product cost reduction, we completed our IntelliSwab packaging redesign in March—one month ahead of schedule—and began to ship products in the new configuration in the quarter. We believe these changes will save over $0.50 per test. We're looking at opportunities to translate these learnings and their benefits more broadly across our product portfolio in an effort to drive longer-term gross margin improvement, while also positively contributing to sustainability. IntelliSwab volumes set a new record this quarter with over $118 million in total sales for our COVID-19 diagnostic testing. As I previously mentioned, we expect IntelliSwab volumes to taper in Q2, and we saw lower demand in April, consistent with disease incidents in the U.S. We are currently working with our Public Health Partners on a path to ensure warm-base manufacturing and readiness for potential infectious disease outbreaks, utilizing previously appropriated funds and existing IntelliSwab contracts. Part of these discussions includes the potential to extend the timeframe under which orders for tests could be fulfilled, similar to what occurred last year. The cash generated from IntelliSwab, in addition to our cost savings, is critical to fund business investments, innovation, and our future growth opportunities. To this end, we've been working to elevate our core portfolio with a longer-term goal to drive sustainable core growth. On our core, we grew sequentially this quarter in diagnostic tests outside of COVID-19, as well as in molecular products. For our HIV and HCV franchises, there were a number of catalysts in Q1. First, we began shipping the first product of our partnership with Emory University under the 'Let's Stop HIV Together' Program, funded by the CDC, which focuses on outreach testing to rural and disadvantaged communities where HIV and its comorbidities are most prevalent in the United States. The early success of this program could potentially lead to its expansion. For HCV, we are also encouraged by the recent White House plan to eliminate HCV, as highlighted in a recent JAMA article by Dr. Francis Collins, the former Head of the National Institutes of Health. Unitaid also made a $31 million investment in preventing HCV in high-risk individuals, such as injectable drug users and prisoners, where up to 25% of these populations have an active HCV infection. Both of these initiatives demonstrate the priority to increase HCV surveillance as well as data collection through outreach testing. Overall, the focus on HIV and HCV and public health aligns with our strengths in both our product offerings and in our distribution for two important sexually transmitted infections that affect at-risk populations. It's a really good example of why sexual health is a priority within our innovation roadmap. Shifting to molecular products, we also grew sequentially in Q1 by 7%. We signed three new important commercial partnerships in the quarter following our recent Quest Diagnostics and Grifols announcement. Each of these deals highlights precision health companies looking to leverage the expanded patient access and reliability that our saliva collection devices can provide. The first deal is with Enriched DX. This deal is a co-promotion using our Colli-Pee device to develop liquid biopsy applications using first-void urine, which has enriched biomarkers for cancer and FDA testing. The second is with Ziwig, a French biotech company commercializing Ziwig Endotes, a breakthrough innovation using Salivary MicroRNA to diagnose endometriosis. This painful condition, which on average takes eight years to diagnose, impacts quality of life and, in some cases, fertility for the estimated 190 million women in the world who suffer from it. The third deal is with Novozymes, a global biotechnology company and leader in biosolutions to provide a full service offering in support of their BiomeFx product. BiomeFx is a personalized health microbiome test which leverages insights from the gut and vaginal microbiome to empower participants to lead healthier lives. The service launched last month, and microbiome samples will be collected using sample collection kits from our DNA Genotek subsidiary and microbiome sequencing and analytics services provided by Diversigen. These collaborations build upon our other recent commercial partnerships in precision health, including our partnership supporting Quest's Genomic Sequencing Services Group's test offerings and our collaboration with Grifols supporting alpha-1 testing for patients at risk for COPD and other lung disorders. In our molecular product portfolio, we made clinical progress this quarter with Colli-Pee. Recently, a team of researchers from Manchester University and Aquarius Population Health, a U.K.-based organization, authored a manuscript that has just been accepted for publication in a peer-reviewed journal entitled 'An economic evaluation of two self-sampling strategies for HPV primary cervical cancer screening compared with clinician-collected sampling.' The model compares the cost and effects of three sampling strategies for HPV primary screening, including routine clinician-collected cervical samples, self-collected first void urine using our Colli-Pee device, and self-collected vaginal flows in 10,000 women eligible for the NHS cervical screening program. Notably, the study concluded that self-sampling for routine HPV cervical cancer screening with the Colli-Pee device could provide a less costly alternative to clinician-collected sampling and other self-sampling approaches. This could support expanding the reach of affordable Colli-Pee mediated cervical cancer screening to underserved women at scale in the U.K. and possibly elsewhere. Through ongoing and prior studies that demonstrate the value of the Colli-Pee collection product as an easy-to-use noninvasive self-sampling device, OraSure is committed to an evidence-based affordable solution with improved patient experience for women around the globe. Beyond our current offerings, we are working to accelerate profitable growth through innovation. As we focus on pipeline expansion, we are advancing both organic and inorganic opportunities across each of our portfolios. In molecular products, we are exploring the potential to build additional functionality for our customers that will further extend our leadership position. We believe that these technologies could provide meaningful complements to our strengths in sample collection and stabilization, and they could be long-term differentiators for us. In our diagnostics portfolio, we anticipate sharing more regarding new infectious disease and sexual health tests later in the year. In diagnostics and across our portfolio, we are also actively evaluating partnerships to meaningfully extend our product pipeline and growth opportunities. Ultimately, the goal of our innovation is to reignite core growth and leverage our unique capabilities to power the shift in healthcare that meets patients where they are, with effortless solutions in point of care and self-test diagnostics, sample collection, stabilization, and in our service solutions. As we look to the future, we will also look for ways to accelerate profitable growth by deploying capital through M&A and further evaluating our long-term capital structure. Our strength today positions us as a partner and collaborator now and for the future. And with that, I'm pleased to turn the call over to Ken to talk about our financial results and guidance.

Ken McGrath, CFO

Thanks, Carrie. I'm pleased to discuss our financial results for the first quarter and provide updates on our financial outlook. First, from a top line perspective, we delivered total revenue of $155 million in the first quarter, which was another record for the company, representing year-over-year growth of 129%. Looking at the components of growth, IntelliSwab is the largest contributor with over $118 million in total sales compared to $22 million last year, representing 434% growth. Our diagnostic products, excluding COVID-19, grew 50% year-over-year. The strong growth was driven by significant domestic HIV sales bolstered by the Let's Stop HIV Together program. We also saw strong international demand despite typical negative seasonality in the first quarter, primarily due to order carryover from the fourth quarter. Looking at our molecular products and services, total revenue declined 48% year-over-year. However, the first quarter of last year included approximately $9 million of COVID-19 collection kit revenue. Excluding COVID-19 collection kits, our molecular products and services declined 27% year-over-year. On a sequential basis, our molecular products grew 7%, showing modest improvement. While we remain emboldened around the long-term trends with our molecular products business and the high level of innovation industry-wide, which supports decentralized sample collection, we continue to see some disruptions with top customers this quarter. We are optimistic our molecular products business will be positioned for improved growth trends as we look to the second half of this calendar year. From a gross margin perspective, our GAAP gross margins in the quarter were 42.5%, and our non-GAAP gross margins in the quarter were 42.8%, compared to 40.9% last quarter. Despite pricing headwinds with new COVID-19 test contracts and mixed headwinds with higher diagnostic test revenue, we showed meaningful positive progress on a sequential basis. As Carrie already mentioned, this quarter, we completed our IntelliSwab packaging redesign transition in March, one month ahead of schedule, which will have a positive impact on gross margins going forward. We believe these changes will save approximately $0.50 per test leading to improved IntelliSwab gross margins looking ahead. We remain focused on our site consolidation with plans to further utilize new automation at our Opus facility for other products in the future. We are also looking at material procurement, product standardization, packaging reductions, and labor efficiencies with our new facilities and automation as future drivers of margin expansion. Additionally, as Carrie mentioned, we are closing our overseas IntelliSwab production lines, which were highly manual in nature. This is expected to improve margins as our US-based production process eliminates overseas shipping and is highly automated and more efficient. In spite of our packaging improvements, one factor that will negatively impact second quarter margins is the mix between our two IntelliSwab contracts. Our expectation is that the preponderance of tests could fall under our lower-priced contract, which means we anticipate some gross margin headwinds on a sequential basis, followed by continued improvement by the above factors in the second half of the year. Moving on to our operating expenses, our GAAP operating expenses in the quarter were $41.5 million, while our non-GAAP operating expenses were $33.6 million, and increased modestly relative to the fourth quarter. This was primarily attributable to the expense timing with our higher litigation spend in the quarter, while we did receive some benefit from our headcount reductions in February. Looking forward, we plan to realize additional efficiencies beginning in the second quarter beyond the $15 million in annualized operating expenses we highlighted during first quarter earnings. Some of these savings are attributable to the scale down of support functions for our IntelliSwab production, which is accounted for in SG&A as well as other identified savings. These savings are critical as we look to utilize our cash for growth investments and are committed to achieving cash flow breakeven in our core business, excluding IntelliSwab revenue, by the end of 2024. This quarter, our GAAP operating income was $24.3 million. Our non-GAAP operating income was $32.7 million, representing 76% sequential growth and a dramatic improvement from our $6.6 million operating loss in the first quarter of the calendar year 2022. From a cash perspective, we ended the quarter with total cash and cash equivalents of $112 million, representing a modest improvement from last quarter. We once again saw significant increases in working capital, which we believe will convert to cash as IntelliSwab revenues taper in the future. We also continue to expect to generate positive cash flow from our $109 million Department of Defense contract. The majority of the cash tied to this expansion has now been spent, and we have $48.1 million in remaining milestone payments to recover from the government as of the end of the first quarter. Turning to our guidance, as Carrie mentioned previously, our April orders from the government for the school program declined compared to ordering levels seen in the first quarter. Consequently, we are guiding to total IntelliSwab revenue of $25 million to $30 million in the second quarter versus $118 million in sales we saw in the first quarter. As Carrie discussed earlier, we are in ongoing discussions with the government. Consequently, we are guiding to a total second quarter revenue of $62 million to $67 million. Our goal with IntelliSwab has been to optimize cash generation for future growth investments. As we work down existing inventory, collect on our significant receivable balance, and meet the remaining milestones on our $109 million Department of Defense facility contract, we expect to generate meaningful cash flow from operations. With that, I'll turn the call back over to Carrie to conclude.

Carrie Manner, President and CEO

Thanks, Ken. In summary, we continue to make meaningful progress on our strategic transformation priorities and in creating a culture that innovates and operates with disciplined execution and accountability to deliver shareholder value. We are highly focused on continuing to improve organizational, structural and manufacturing efficiencies, optimizing the IntelliSwab cash generation opportunity, and bolstering future core growth through strategic partnerships and internal development to expand our pipeline of innovation. We also continue to believe that our foundational capabilities and strengths can help power the shift in healthcare delivery, meeting patients where they are to increase access, affordability and quality of care. We look forward to updating you on our progress as we continue to execute on our transformation journey. And with that, I'm pleased to turn the call back over to Scott for Q&A.

Scott Gleason, SVP of Investor Relations and Communications

Thanks, Carrie. Operator, we are 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.

Operator, Operator

Thank you. At this time, we will conduct the question-and-answer session. Our first question comes from the line of Patrick Donnelly from Citi.

Unidentified Analyst, Analyst

Hi. This is Liz on for Patrick. Thanks for taking my question. So, I guess, first, on the pull forward of the international diagnostic orders, are you able to quantify how much of that was part of this quarter?

Ken McGrath, CFO

Yeah. Thanks for the question. I think when you look at the total international orders in the quarter, they were approximately $10 million this quarter. When you look at last quarter, we saw a similar amount. Typically, in the fourth quarter, we see positive seasonality because orders are placed by NGOs and other non-governmental organizations. What you saw this quarter is probably some carryover. We talked about that on our fourth quarter earnings call, that there was some demand that we weren't able to completely fill. So, I think a $10 million figure gives you a good idea about how much you might have seen.

Unidentified Analyst, Analyst

Understood. Thank you. And then I'm great to see the $0.50 cost savings per test. I think that was up from $0.40 that you discussed last quarter. I'm just wondering how some of those cost initiatives could be implemented towards other tests. I think you may have touched on this. So, is that something that we can expect to hear about this year? Just wondering how that could be applied? And thanks. That’s it for me.

Ken McGrath, CFO

Yeah. I think I heard your question was: Can we leverage the opportunity and the cost savings from IntelliSwab on the other product lines in the business? The short answer is yes. What we developed with IntelliSwab was automation capabilities that we are leveraging on our other existing products and product lines, like HIV and HCV, that we will be leveraging going forward.

Carrie Manner, President and CEO

And specifically regarding the packaging redesign, that's a product—I'm sorry, an opportunity we look at product by product because that does involve resubmission to the FDA. So we're looking at lessons learned, the benefits of those and aren't prepared to share anything specifically by product or on timing. But I think it really does inform our development and opportunities moving forward.

Unidentified Analyst, Analyst

Great. Thank you.

Carrie Manner, President and CEO

Great. Thanks for your questions.

Operator, Operator

Please stand by as we get our next question ready. Our next question comes from Alexandra from Evercore ISI. Please go ahead.

Unidentified Analyst, Analyst

Hi. Thanks for taking my question. I just have one on gross margins. You're up year-on-year and sequentially. Can you just talk about the progression that you're expecting for the rest of the year?

Ken McGrath, CFO

Yeah. If you think about gross margins, there are several drivers. One of the headwinds that we mentioned earlier in the prepared remarks was around the mix of IntelliSwab contracts. As we've shared before in previous calls, we have three contracts with the government. The first one is, and I think we've shared this in the past, is $5. The second one is approximately $3. What we're expecting in Q2 is the preponderance of our volume to come from that second contract. So that will be a headwind; the offsetting tailwinds, as we mentioned, is the packaging redesign, which will help us drive efficiency, as well as some other efficiencies we mentioned in automation that we continue to drive. That's how I would think about your model going forward.

Carrie Manner, President and CEO

And we expect Q2 to be a temporary compression based on that mix to then recover in the second half.

Unidentified Analyst, Analyst

Sorry, I was just going to ask a follow-up and if you could just talk about the margins between InteliSwab and the base business, like how we should think about margins between those two segments?

Scott Gleason, SVP of Investor Relations and Communications

Yeah. I think, Alexandra, what we've kind of shared there is when you look at our key business units, the biggest mix driver that we've seen is the amount of revenue that's associated with our diagnostic products and the amount that's associated with our molecular products and services. The trend has been for diagnostics to increase dramatically. The highest margin portion of our business is our molecular products. As the mix begins to shift, one of the drivers as we look at the back half of the year is that the mix begins to shift increasingly again back towards molecular products; that will actually be a positive driver of our gross margin in the second half of the year.

Ken McGrath, CFO

Just to add to what Scott said and build off of what Scott said. One of the items that we had in IntelliSwab that we've seen over the last year or so is the improved gross margins in IntelliSwab to the point where it's actually above our overall weighted average for gross margins.

Unidentified Analyst, Analyst

Great. Thanks.

Carrie Manner, President and CEO

Thanks, Alexandra.

Operator, Operator

Thank you. Our next question comes from Casey Woodring from JPMorgan.

Carrie Manner, President and CEO

Hi, Casey.

Casey Woodring, Analyst

Hi, guys. Thanks for taking my questions. Just on the 2Q guide on the non-COVID side, at the midpoint, it looks like growth will be flat year-over-year and sequentially. Can you just talk about what's embedded for growth in both molecular and the core diagnostics business in that 2Q guide?

Scott Gleason, SVP of Investor Relations and Communications

Yeah, Casey, I think when you look at the different components, we obviously had elevated international sales in the first quarter, so we are expecting that to taper some. With our molecular products business, what we said on the call was that we're not expecting a huge change in the second quarter, but we're optimistic as we look towards the second half of the year that we could start to see some improvement there. So that's really what's factored in when you look at the two pieces and a relatively flat sequential core business implied by the guidance.

Ken McGrath, CFO

To build on what Scott said, on the diagnostics side, we saw an increase from our HIV program with Emory in Q1, which was promising going forward, but that’s one of the areas that we felt was a little bit more sequentially flat going forward.

Casey Woodring, Analyst

Got it. That's helpful. I wanted to touch on the milestone payments. You mentioned, I think it was $48 million worth. What do you need to do to receive those? And do you expect to receive them this year? Can you elaborate on those?

Ken McGrath, CFO

Yeah, definitely. That's a great question. So of the $48 million, we still have to spend a few dollars left. So think of that as a net $40 million when you think about the dollars we have to spend going forward and then what we collect of the $48 million. We expect to receive it all by the end of the year. The plan is to prove our ability to deliver capacity to the government and go through their regulation. Right now, the plan is to have that completed in Q4. At that point, we will receive the full payment of $48 million.

Carrie Manner, President and CEO

And we're well on track.

Ken McGrath, CFO

And we're well on track for that, absolutely.

Casey Woodring, Analyst

Got it. That's helpful. And then last one for me. Just, Carrie, you talked a lot about Colli-Pee on the call, I guess, maybe more so than previous calls. So can you just remind us how big that business is today? And with all of those catalysts you kind of talked about here, how do you think that product can grow maybe this year and then over the next several? Thank you.

Carrie Manner, President and CEO

Yes, Casey, thanks. Well, Colli-Pee is not big enough for us to have called out yet. We are excited about it because of the potential to unlock liquid biopsy in urine, both through oncology biomarker insights as well as STIs. So, I think what you hear us encouraged by is the sort of progress in clinical proof and the fact that we have CE Mark today for a variety of different product volumes and chemistries. So, there are different chemistries between the oncology and STI applications. With CE Mark today, we think there's opportunity, and we'll be working the path to US regulatory clearance. I'd say not immaterial in terms of current volume, but with real long-term potential that we're not guiding to yet, but we want to set the stage with the clinical progress. Thanks, Casey.

Operator, Operator

Okay. And our final question is from Andrew Cooper from Raymond James. Please go ahead.

Unidentified Analyst, Analyst

Hi, this is Liam on for Andrew. Thank you for taking my question.

Ken McGrath, CFO

Hey, Liam.

Unidentified Analyst, Analyst

Hi. Carrie, you talked about further cost savings from that $15 million you called out before. Can you kind of walk me through how that might look for the rest of the year? Thanks.

Scott Gleason, SVP of Investor Relations and Communications

Yes. Liam, we're not ready yet, and we didn't quantify those, but the savings are significant. Some of them have yet to be fully completed and so we're working through that right now. We would look to quantify that for you later on. So, look for an update on that in future calls.

Ken McGrath, CFO

And just to put it in context, remember, our stated target is to have cash flow from operations breakeven on our core business by the end of 2024.

Unidentified Analyst, Analyst

Great. That's helpful. Thank you. And just on one other thing, while the Together Take Me Home HIV program, nice to see a little bump there. I was wondering how the back half might look. Can we see incremental growth there? And then also on the molecular side, what products should we think about raising that for in Q3 and Q4? Thanks.

Ken McGrath, CFO

Yes. We haven't guided specifically to any individual product, Liam. When you think about the Let's Stop HIV program, it's a three-year program where funds have been allocated. We would expect that under the program, you would see orders over time. It might be a little difficult to predict exactly what the timing of that looks like—it could be somewhat lumpy from quarter to quarter. But yes, we're not guiding to any specific product in terms of overall dollars.

Scott Gleason, SVP of Investor Relations and Communications

Yeah. We've said in the past that with the five years, about 200,000 units per year, and then the average price you can think about is our typical price for our HIV test.

Carrie Manner, President and CEO

What you heard us describe is the launch of the program in Q1 got off to a very good start with very strong adoption within communities. That momentum is a positive sign. As we have more to share about any potential changes to that ordering, we will share that as well.

Ken McGrath, CFO

Where we're pleasantly surprised, we're not surprised but encouraged by the channel and the usefulness of that channel from our public health partners.

Unidentified Analyst, Analyst

Great. Thanks.

Carrie Manner, President and CEO

Great. Thank you. Amanda, is that—all the questions?

Operator, Operator

That's all the questions. Turning it over to you, Carrie, for closing remarks.

Carrie Manner, President and CEO

Excellent. Thank you to everyone for participating in today's call. Thank you for your continued interest in OraSure. Have a good afternoon and evening, and stay safe and do well. Thank you so much. That, we’ll close.

Operator, Operator

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