Earnings Call Transcript - OSUR Q4 2022

Scott Gleason, SVP of Investor Relations

Good day, and thank you for joining us. Welcome to the OraSure Technologies 2022 Fourth Quarter Earnings Conference Call. I would now like to introduce your speaker today, Scott Gleason, Head of Investor Relations. Please proceed. Thanks, Victor. Good afternoon, and welcome to OraSure Technologies Fourth Quarter '22 Earnings Call. I'm Scott Gleason, the SVP of Investor Relations and Communications. And 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 the Investor Relations section of our 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, other financial performance, product development, performance, shipments and markets, business plans, regulatory filings, approvals, expectations and strategies. Actual results could differ significantly; 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 ending December 31, 2021, 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, CEO

Thanks, Scott, and thank you to everyone for joining us today. In the fourth quarter, we once again delivered strong top line results, which exceeded our prior financial guidance, generated cash of $9 million in the quarter and made further progress in our strategic transformation journey. As we look to important aspects of how we are transforming, we have predominantly been focused on strengthening our foundation, expanding our cost reduction programs. Today, we announced a reduction in our nonproduction workforce of 11%. These changes better align our organizational structure with the realities of our business. We believe the restructuring allows us to utilize our COVID-19 cash generation to support incremental growth investments, while targeting to achieve cash flow breakeven for the core business, that is non-InteliSwab revenue by the end of 2024. In 2023, we are focused on elevating growth across our core portfolio, increasing the reach of our current products, expanding segments and further enhancing our enterprise capabilities to drive business efficiency and growth. As an early proof point in our strategy, we signed a deal with Quest Diagnostics to serve as the preferred provider of saliva collection kits for Quest's Genomic Sequencing Services Group test offerings. We also have several co-clearances of sample collection devices underway with partner companies for their novel assays, similar to our recent Grifols announcement. As we gain momentum across our business, we'll also look for opportunities to further accelerate growth through our own innovation pipeline, along with enhanced strategic partnerships, as well as potential acquisitions. In order to provide more detail on our strategic progress, I'll begin with our organizational restructuring and efforts to drive core business profitability. First, we consolidated our two business units into one OraSure and have just announced the reduction of our nonproduction workforce by 11%. Streamlining our organization makes sense for our size and for the potential to unlock significant efficiencies, enhance collaboration while simplifying our leadership structure, increase revenue synergy opportunities and improve resource allocation across the company. It will also allow us to leverage our enterprise functions such as manufacturing operations, R&D, quality and regulatory, along with our digital IT assets enterprise-wide. We anticipate the restructuring, along with other process improvements and cost reductions, will deliver operating expense savings of approximately $15 million per year, when fully implemented at the end of the first quarter. As we lay the groundwork here for long-term cash generation, we have also made enhancements to our enterprise capabilities and manufacturing operations. I am pleased to announce that our new packaging and labeling configuration for InteliSwab has been authorized by the U.S. Food and Drug Administration, and we expect this new configuration to begin shipping by the end of this March. These changes have been a major undertaking by our team, and will drive per test cost savings of approximately $0.40. This includes the impact from lower shipping costs based upon the smaller packaging configuration, which will reduce total truckloads by approximately 50%. Furthermore, it will reduce our environmental impact, since these changes will save on the order of 90 tons of plastic and 1,500 tons of paper from entering the waste stream. We are looking to apply these learnings to other portfolio products as well, such as our HIV self-test, and we believe we can unlock additional savings through further standardization and process enhancements. Contributing to our continuous process improvements, I'm pleased to share the addition of Trace Custer to our executive team leading quality and regulatory. Trace is a highly experienced life sciences industry veteran with leadership experience across numerous healthcare companies. Having joined us in Q4, Trace has now helped us implement a number of improvements to help lead in our restructuring and is evaluating further areas for efficiency, such as within our recent implementation of an electronic quality management system. On systems, I would also highlight that we have now fully launched Salesforce.com across our commercial team. Using a standard CRM enables better monitoring and improvement of our sales KPIs, including in areas like pipeline growth and conversion success. I am a strong believer in operating rigor and every one of our teams at OraSure now has established sets of leading and lagging key performance indicators to drive visibility and accelerate our success, each of which along with those we roll up across the enterprise, we believe will drive results and deliver shareholder value. As I've mentioned repeatedly, our organization has strengthened our foundation and is increasingly focused now on elevating our core growth and our strategic transformation. This quarter, we established some early proof points that we believe help set the tone for our longer-term roadmap, as we look to establish the company as a leader in self-testing and point-of-care diagnostics, as well as effortless sample collection and services. First, within our Diagnostics segment, we are working to expand our respiratory assay portfolio, building on our success with COVID-19 lateral flow testing. We believe that InteliSwab will transition to become part of our core and combination influenza tests will become an important diagnostic for two of the most widespread clinically actionable and serious respiratory viruses. As such, we are working internally and in partnership externally to address this healthcare need around the flu. While we are not yet prepared to share details, we do believe in the important role of this test, as a part of the commercial expansion of our respiratory portfolio. Also in InteliSwab this quarter, we won two additional contracts from the U.S. federal government. On the first contract, the U.S. Defense Logistics Agency agreed to purchase an estimated 18 million tests of InteliSwab COVID-19, with a maximum award of 36 million tests and a guaranteed minimum award of 3.6 million tests. The contract runs from November 2022 through November 2023. Additionally, we were notified by the government of an incremental award of 3.2 million tests in December. Fulfillment of both of these awards has been running concurrently with our existing government contract, that is supporting the school testing program. Under our federal government contracts, we have shipped approximately 46 million tests as of the end of the fourth quarter and have up to 64 million additional tests, which can be purchased, assuming the government orders the target number of tests under our second RFP win. Additionally, in December, we were one of a group of companies awarded a tender for the state government of Connecticut, which also allows us to compete for up to 6 million additional tests. As we think about growth drivers for diagnostics in 2023, we've also been notified that we will receive our first orders from Emory University supporting outreach testing under the Let's Stop HIV Together initiative. Furthermore, our OraQuick In-Home HIV test is now offered on amazon.com directly, with Prime fulfillment. While our online sales via Amazon are relatively small, they are increasing as we fulfill more customer orders and have moved up in terms of the search algorithm. We are also encouraged by recent U.S. government funding and future potential funding, focused on healthcare conditions we serve. Moving to our molecular testing business; the headwinds we've discussed have continued, as some of our key customers have taken a more cautious stance on their near-term business outlook. That said, we believe the fundamental backdrop supporting genetic sample collection remains very attractive, as the number of applications continues to expand, and precision health is key to the future of healthcare. Examples of these trends include the increase in high-value diagnostics and precision therapeutics, along with clinical laboratories increasingly working to reach patients in lower acuity settings, such as in-home and retail, and like the deal I mentioned with Quest. As we think about expanding our collection kits business, we would also highlight progress with Colli-Pee. This quarter, we launched four new CE IVD products in women's health and beyond. Additionally, we have multiple clinical research and commercial co-clearance collaborations kicked off in an effort to continue establishing first void volumetric urine as a validated sample type for HPV screening, women's health therapeutics and the detection of oncology biomarkers. Finally, I would point out the recent FDA approval of the first microbiome-based therapeutic to prevent C. difficile in adults with recent data showing that these therapeutics improve health outcomes. This approval paves the way for other biotherapeutics, and we believe will serve as a positive catalyst for microbiome-based investment in new research studies. In conclusion, we have made significant progress strengthening our foundation by resetting our cost structure and operating rigor. This progress will facilitate future growth investments and sets the stage for us to achieve cash flow breakeven by the end of 2024. As we look forward here in 2023, we are increasingly focused on elevating core business and increasing our innovation pipeline to accelerate profitable growth. With that, I am pleased to turn the call over to Ken to discuss our financial results and guidance.

Kenneth McGrath, CFO

Thanks, Carrie. I'm happy to talk about our financial results for the fourth quarter and share updates on our financial outlook. First, we achieved total revenue of $123.1 million in the fourth quarter, marking another record for the company and representing year-over-year growth of 94%. Our Diagnostics business unit contributed total revenue of $107.3 million in the quarter, which is a 228% increase from last year. Most of this growth came from IntelliSwab, which saw nearly sixfold growth year-over-year, while our core diagnostics business grew 3% in the quarter. Core growth was negatively affected by the timing of international orders, which decreased compared to last year. However, many orders were delayed until the first quarter of 2023, and we expect a strong first quarter for our international diagnostics business. Additionally, we will begin receiving our first orders under the Let's Stop HIV Together program in the first quarter, which will enhance our domestic HIV business. Our Molecular Solutions business unit had revenue of $15.8 million in the quarter, a decline of 49% compared to the fourth quarter of last year. When excluding COVID-19 revenue, the decline was 32%. Although we continue to gain new accounts, two of our large consumer-oriented customers and one major clinical lab ordered significantly fewer products compared to Q4 of 2021. We believe this was due to reductions in excessive inventory as these accounts adjust to macroeconomic challenges. We also faced a comparable period against a significant research study purchased in 2021, which did not recur in Q4 of 2022 despite ongoing needs. Looking ahead, we anticipate ongoing volatility in this segment due to macroeconomic conditions affecting some of our largest customers. Despite this volatility, we remain optimistic about expanding genetic testing through partnerships, like our deal with Quest Diagnostics, as well as supporting new diagnostic assays while onboarding new customers. From a gross margin perspective, our non-GAAP gross margins for the quarter were 40.7%, improving from 40.0% last quarter, showing positive sequential progress. The continued shift in revenue towards our diagnostics business unit created some margin challenges, with 87% of revenue coming from diagnostics compared to 84% last quarter. We are making plans to enhance our long-term gross margin profile, including exploring further packaging improvements, standardization across products, transitioning our legacy test automation, and consolidating sites based on future volume projections. As mentioned earlier, we plan to transition to our new packaging configuration for InteliSwab late in the first quarter of 2023, which we expect will save about $0.40 per test and significantly impact our gross margins. However, it's important to note that due to lower pricing under the new RFPs, we anticipate some gross margin pressure in the first quarter, with improvements expected as the year progresses and as mix and manufacturing efficiencies enhance our cost structure. Moving on to our operating expenses, our non-GAAP operating expense for the quarter was $31.8 million, down by $3.5 million compared to the third quarter. The decrease in operating expenses is due to timing, lower bad debt, and our focus on cost control. Looking ahead, we expect the anticipated $15 million in annualized operating expense savings highlighted by Carrie to be fully realized starting in the third quarter of 2023. As part of achieving these savings through workforce reductions, we will incur a one-time severance expense of $2 million in the first quarter. In anticipation of InteliSwab revenue decreasing in the second half of 2023, we will implement further cost reductions in our manufacturing operations. Across all our cost reduction efforts, we aim to reach cash flow breakeven in our base business, excluding InteliSwab revenue, by the end of 2024. The expense savings will allow us to make targeted investments with attractive returns, using the significant cash generated from InteliSwab in the upcoming quarters. From a cash standpoint, we finished the quarter with total cash and cash equivalents of $111 million, an increase of $9 million from last quarter. Working capital increased significantly during the quarter, which we believe will convert to cash as InteliSwab revenues decline. We also anticipate positive cash flow from our $109 million Department of Defense contract to expand our InteliSwab capacity. Most of the cash related to this expansion has been spent, and we expect positive cash flow as we meet milestones under the contract. Given the ongoing volatility with InteliSwab, we will only provide quarterly guidance for the fiscal year. In the first quarter of 2023, we are guiding revenues of $125 million to $130 million, which represents year-over-year growth of 85% to 92%. Regarding the revenue timeline throughout the year, we expect strong InteliSwab revenues in the first half while fulfilling our government contracts, followed by significantly reduced InteliSwab revenue in the third and fourth quarters. We are focused on driving momentum in our core business as we conclude the year by implementing our planned cost savings and seeking opportunities for core growth throughout 2023.

Carrie Manner, CEO

Thanks, Ken. We continue to make meaningful progress on our transformation journey this quarter, as the company focuses on innovating and operating with disciplined execution and accountability. We have now firmly positioned the company on a strong financial footing and expect to see our balance sheet improve through 2023, creating the opportunity for future growth investments. As we look forward, core growth is our predominant focus as an organization, and our team is motivated to deliver this year. We continue to believe that our capabilities can help power where healthcare delivery is going, meeting people, patients where they are, providing innovation and care at the lowest possible level of acuity. Therefore, we are excited about the opportunities in front of us. And with that, I'm pleased to turn the call back over to Scott for Q&A.

Scott Gleason, SVP of Investor Relations

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

Our first question will come from Vijay Kumar from Evercore ISI.

Vijay Kumar, Analyst

Can you provide an update on the base business? Is it positioned for growth now, or do we still view 2023 as a transition year? Additionally, while you mentioned the consumer genomics market, you've also established new partnerships. Can you clarify what the revenue trajectory for the base business should look like post-COVID?

Kenneth McGrath, CFO

No, great question, and thank you for that. Our guidance of $125 million to $130 million for Q1 indicates that the InteliSwab revenue will be approximately the same, either flat or slightly increased compared to the previous quarter. This suggests that our core business is relatively stable compared to Q4.

Carrie Manner, CEO

And I'd add on molecular. While we don't expect a snap recovery in the first half of 2023, we do remain optimistic about the long-term fundamentals of that segment. We shared some positive signals like the deal with Quest; it really is about those end segments. We are adding customers and staying closely connected with them. So while I just want to reiterate that we don't expect a snap recovery, we do anticipate strength in long-term growth in that attractive market, which we continue to serve.

Vijay Kumar, Analyst

Understood. My follow-up is about gross margins and free cash flows. We saw a slight improvement in gross margin from the third quarter. Looking ahead, we aim for gross margins to exceed 50% in the long term. What do you expect the gross margin trend to be? Also, regarding free cash flow for the base business, you mentioned achieving positive free cash flow by the end of fiscal '24. Is the current cash balance of over 80 sufficient for reaching that free cash flow positivity?

Scott Gleason, SVP of Investor Relations

Hey Vijay, thanks for the question there. A couple of things as we think about the margin profile of the business. Obviously, we've seen a very significant mix shift from molecular to diagnostics over the last 12 months. Eventually, we're going to get to the point where we would expect to see InteliSwab start to taper some. We obviously made the comments in the press release, where we talked about we expected the first half of the year to have a much higher weighting towards InteliSwab than the second half. As that mix transition occurs, you will start to see some margin benefits because the molecular business has a higher underlying margin structure to it. The other things that Ken mentioned that we're focused on, is when you look at the manufacturing side, we still have some significant changes that we're looking at in terms of site consolidation, standardization across products and then also looking at things like some of the learnings from InteliSwab, transferring that to the additional tests, which we think will drive margin improvements over time. And so it's something we're focused on. We kind of see this as a marathon, not as something that's going to happen in any single quarter. And so it's something where we're going to make continual process improvements. But we have a new Director of operations, or a new SVP of Operations, Zach Wert, who is highly focused on driving efficiencies across our business, and it's something we're going to keep working on throughout the year here.

Kenneth McGrath, CFO

Yes, from a cash perspective, we increased cash quarter-over-quarter. One thing we highlighted is that our working capital increased during Q4. A lot of that was due to ramping up for some of the government business, as well as for the packaging changeover we are implementing. If you examine it, our inventory increased by about $17 million quarter-over-quarter, and our accounts receivable rose by $9 million. We believe that this is highly convertible to cash given the government contract and the business it supports.

Operator, Operator

Our next question will come from the line of Patrick Donnelly from Citi.

Elizabeth Speyer, Analyst

Hi, this is Lizzie speaking for Patrick. To start, I believe you mentioned that some of the consumer-oriented customers were placing fewer orders this quarter. How quickly do you think they will deplete their inventory? Do you anticipate it will take about two quarters, or do you think it will extend into the second half of the year? I have a follow-up question as well.

Scott Gleason, SVP of Investor Relations

Yes, Lizzie, I think the guidance that we provided is that we're not going to see kind of a snap recovery here in the first half of the year. That said, when we look at the end market growth for our core customers, most of them are continuing to grow. And you can see that among a lot of the clinical laboratories that you guys cover, that the end markets remain growing. That's what makes us confident that some of the softness that we've seen is tied to inventory rebalancing. We are seeing some labs having some financial challenges, and so they're trying to preserve cash. And so that activity is, we believe, translating into the business. And so that gives us confidence in the longer term. But I think the bigger thing that Carrie mentioned is the fundamental backdrop we see for the market overall is exceptionally strong. And we've seen an increased interest in people reaching patients where they are. We had the Grifols deal last quarter. We had the Quest deal this quarter. I think that's a strong example of the types of demand that we're seeing from customers, and we expect that to continue. And it's something that we're going to be focused on heavily this year, as we focus on growth.

Elizabeth Speyer, Analyst

Great. Regarding your priorities for reinvesting in the business, you mentioned site consolidation, standardization, and new packaging. What are the other areas you are considering, such as cost reduction or internal investments?

Kenneth McGrath, CFO

Yes. As you mentioned, our focus areas include InteliSwab, which we have progressed on in recent quarters while achieving significant cost reductions. In the first quarter, we will see cost savings in packaging as well. Another area of focus is our facility site rationalization, seeking to optimize our footprint. Additionally, as Scott noted, we are looking to apply the capabilities we've developed with InteliSwab to other product lines to achieve further efficiencies. These are the main areas we will concentrate on, along with the restructuring we announced earlier today.

Operator, Operator

Our next question comes from the line of Brandon Couillard from Jefferies.

Brandon Couillard, Analyst

Carrie, regarding the restructuring and the 11% reduction in headcount in nonproduction areas, should we view those positions as primarily non-revenue-generating? Also, when you merge molecular and diagnostics, will that affect how you report segment revenues? Lastly, about the $50 million savings, should we consider that a gross or net figure? You indicated a desire to possibly reinvest some of that in growth; will that be seen more in 2024, or should we expect to see it sooner?

Carrie Manner, CEO

Brandon, I'm going to let Ken start on the segment reporting, and then I'll hit the restructuring piece.

Kenneth McGrath, CFO

Yes, Brandon, we plan to begin reporting as one segment in the first quarter of 2023, reflecting the changes we've made to our organizational structure and our approach to running the business moving forward. Regarding the annualized cost savings of $15 million that we've mentioned, it's important to view it in conjunction with the cash generated from InteliSwab and the ongoing cash flow from that product. Our strategy is to build a cash reserve that we can invest back into the business, whether through organic growth initiatives or acquisitions. While we can't discuss specific examples during this call, our plan is to focus on delivering results with InteliSwab, enhance our efficiency in our core business, and utilize the savings for future reinvestments. This reinvestment will target both organic and inorganic opportunities, based on what presents the best prospects. Carrie, would you like to add anything?

Carrie Manner, CEO

We are concentrating on strategic partnerships that make sense, which has been our focus from the start. You will see us increasingly working to drive growth through these partnerships. Regarding the restructuring, we have made adjustments to foster growth without hindering our progress. Our cost-cutting efforts began with simplification, which involved consolidating functions across the organization. As a smaller business, it doesn't make sense to have distinct business units, so we are eliminating redundant management positions and focusing on opportunities for value creation. This consolidation really aligns with our size. Now that we have strengthened our foundation, the priority is to enhance our core growth. I want to emphasize that our innovation efforts combined with strategic partnerships will help us rebuild our cash base even stronger.

Kenneth McGrath, CFO

And Carrie, as you mentioned, coupled with the restructuring, there's also a focus on process improvements within the organization to help drive our efficiency as we go forward.

Brandon Couillard, Analyst

Got it. Okay. And then on InteliSwab, do you think you could give us a feel for the magnitude of the sequential gross margin improvement you may have seen just for that product? And what is the $0.40 of savings from the new packaging mean to the gross margin profile of that product?

Kenneth McGrath, CFO

I don't think we've given that level of detail out in our numbers. But I'll tell you how to think about it, right? So right now, I think we mentioned there was 46 million tests delivered through December of last year, and about 64 or so million tests remaining going forward on the three contracts that we have. Now one element is, some of those contracts have lower price points than the original contract. So that's one headwind. However, to your point, as we offset that, you can think of the $0.40 per test being implemented by the end of this quarter. And then based on the remaining volume of those tests, it's a simple math there. Scott, I think that's about what we've said publicly, correct?

Scott Gleason, SVP of Investor Relations

Yes. Ken, obviously, Brandon, we've said the preponderance of our revenue is still under those government contracts, which the pricing has been disclosed. So when you think about $0.40 relative to that test pricing, obviously, it's a very significant increase in the gross margin structure for that business. On a sequential basis, while we didn't give the gross margins, we did see a meaningful improvement in terms of InteliSwab on a sequential basis as well.

Operator, Operator

Our next question will come from the line of Jacob Johnson from Stephens.

Jacob Johnson, Analyst

Just maybe the other side of the restructuring you announced today, the One OraSure initiative. Carrie, you mentioned the potential for enhanced collaboration and revenue synergies. Can you just talk about some of the opportunities you see as you unite the segments?

Carrie Manner, CEO

Absolutely. Jacob, we've shared details about the restructuring this quarter, particularly the formation of a product office that integrates our commercial teams in sales and marketing, product management, and R&D under Kathy Weber. This initiative presents opportunities across our collection kits, where we have strong relationships and can expand into new applications for those kits, microbiome services, and enhancing the capabilities of our Diversigen business. To be clear, while we see the potential for increased cross-selling, this restructuring allows us to maintain the specialized strengths within our portfolio. Although we are creating a single product office to foster collaboration, we are also focusing on best practice sharing. The sales teams will retain their specialization while also adopting a strategic account approach to enhance our efforts, all while preserving our service capabilities.

Jacob Johnson, Analyst

Okay. That's helpful. And then just for my follow-up, I think last quarter, you mentioned inorganic growth opportunities. Ken just mentioned, I think, in the answer previously. Certainly, I understand you're not going to tell me what you're going to buy. But in terms of maybe timing and your appetite for M&A, do you think you've accomplished a lot of maybe some of the operational internal organic initiatives, that sort of blocking and tackling, such that now you can start looking? Or do you feel like there's still some more things you need to do before you look to M&A?

Carrie Manner, CEO

To your point, Jacob, there are still things internally we can and will do to increase our innovation pipeline. And so this focus on strengthening our foundation, we feel like puts us on very solid financial footing, while we simultaneously increased our internal pipeline and all of the process rigor around that. And then I said it before, but I'm going to emphasize again, strategic partnerships are the way where we get momentum before we have the cash because we're going to be very judicious and not threaten any aspect of our liquidity. But strategic partnerships give us that way to think about how we can expand our value chain capabilities within each of our portfolios and then potentially position for the right M&A, as it's available. So while we're not talking specific M&A, I focus on strategic partnerships and value chain expansion in the segments in which we play.

Operator, Operator

Our next question will come from the line of Andrew Cooper from Raymond James.

Andrew Cooper, Analyst

Thinking about the gross margins, I know this has been discussed a bit already. With InteliSwab margins improving sequentially, you mentioned the core margins have declined somewhat from quarter to quarter, which appears to be the case. Can you provide insights into what else, aside from product mix, might be influencing this? Did the performance align with your expectations? Also, on a constant mix basis, what does the core gross margin look like, and how should we anticipate it trending for the remainder of 2023?

Kenneth McGrath, CFO

Yes, I think you're thinking of the right elements as you go through it. Mix, as Scott mentioned, as we mix towards more diagnostic, which has an overall lower margin than molecular over the past couple of quarters, that's kind of a headwind to overall gross margins. However, the team through their great work has offset a lot of that, with improvements in efficiencies, in particular with InteliSwab. And they will continue to do that, as we mentioned, with the packaging and freight reductions of about $0.40 per test as we go forward. So I think you're thinking of the right elements in there. The other area that we've made improvements in margin is, as we bring on more volume, we do better with our overall absorption in the facilities that we have. That's an area that we focused on, as well as a significant reduction in scrap along the way. So I think you're thinking of it the right way.

Scott Gleason, SVP of Investor Relations

Yes. I would like to point out two additional areas. This quarter, we observed a higher international mix in our Diagnostics segment. The international diagnostics business generally has a lower gross margin compared to our U.S. domestic diagnostics. Another aspect to consider regarding our margin structure this quarter is that the COVID molecular kits once had a very high margin, being the most profitable product for the company. As demand for these kits decreased, it has also posed some challenges for the overall business.

Andrew Cooper, Analyst

Okay. Helpful. And maybe just following up on one of those things, just in terms of the facility footprint and how you think about that. Obviously, the government's funding a lot that can probably be used beyond InteliSwab. So should we be thinking about that as likely being some of the legacy facilities moving into that super factory you've talked about before? What do timelines sort of look like for that? And anything else we should think about from that footprint perspective?

Kenneth McGrath, CFO

Yes, at a high level, you're correct. That's how we're approaching it. We haven’t provided any timelines at this point. You can sense our urgency. We have a facility and capabilities we've developed, and now we want to maximize their use. This is the analysis and approach we are currently considering. While I can't provide a timeline, there is indeed a sense of urgency in our operations.

Carrie Manner, CEO

Yes. Site consolidation is a priority. And those capabilities we have built the super factory, Andrew, that you appropriately remember can be translated across our OraQuick platform and leverage more broadly in the portfolio.

Operator, Operator

Our next question comes from Casey Woodring from JPMorgan Chase.

Casey Woodring, Analyst

The stocking and genomics, is that a one-quarter dynamic here in 2023, or is it perhaps something that you see lasting into the second half of the year? How do you see stocking playing out through the course of this year, and do you see this business growing in 2023?

Scott Gleason, SVP of Investor Relations

Yes, Casey. I think as we talked about from a guidance perspective, obviously, we don't provide specific business unit guidance. That said, we have seen kind of a general trend. A lot of companies right now are in cash preservation mode. And so when we look at companies across our customer spectrum, we think that many are bringing down inventory levels from a cash preservation standpoint. I think it's tough to predict exactly when that's going to end. Our guidance that we gave roughly on the call was that we would expect relatively similar trends here in the near term, but we're very optimistic longer-term. And so we're hoping to see some improvement as we go throughout the year for that business. But we haven't provided specific business unit guidance.

Carrie Manner, CEO

Yes, and I would add that despite the headwinds, we believe there are powerful growth drivers, and we are excited about the opportunities that the collection kits and partnerships will provide as we move through the year.

Casey Woodring, Analyst

Okay. That's fair enough. And then my follow-up is just on the Quest partnership. How much upside does this provide in 2023? Can you give us a sense of how many tests a year you would be providing products for and how we should be modeling the impact to margins there?

Carrie Manner, CEO

Yes Casey, while we're not sharing specific details of it. What we would say is that, as the preferred provider for Quest's genomic sequencing services test group, it's for all saliva collection for that business. So we're obviously hoping and cheering for their launch. We will be hoping that that grows, and I think we'll be staying tuned. The opportunity though is for customers like Quest and I'd say just this theme of moving to meet patients where they are, the beauty of our effortless sample collection, is that we can power the entire industry in doing that. So our strategy is to increasingly be the go-to sample collection innovator across sample types. So I think while it's a great example, and we're rooting for them, we're really looking to be that partner across the whole industry.

Operator, Operator

And I'm not showing any further questions in the queue. I'd like to turn the call back over to Carrie for any closing remarks.

Carrie Manner, CEO

Thank you all for joining today. We appreciate your interest. As we look towards 2023, we want to highlight our transition from strengthening our foundation and establishing a solid financial base to focusing on core growth and accelerating towards profitability. We will have more updates soon. Thank you once again, and have a great night.

Scott Gleason, SVP of Investor Relations

Thanks, Carrie. Operator, we are now ready to conclude today's conference call. Thank you for participating. You may now disconnect. Everybody, have a great day.