OraSure Technologies Q2 2023 Earnings Call Transcript

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August 3, 2023

There are 7 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the OraSure Technologies 2023 Second 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 Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jason Plagman, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Good afternoon, and welcome to OraSure Technologies' Q2 2023 earnings call. Participating in the call today for OraSure Sure are Kerry Eglinton Manor, our President and Chief Executive Officer and Ken McGrath, our Chief Financial Officer. As a reminder, today's webcast is being recorded and a 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.

Speaker 1

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 ks 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 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.

Speaker 2

Please note that we will

Speaker 1

be discussing certain non GAAP to the most comparable GAAP measures and reconciliations thereof can be found in the press release that is posted on our website. With that, I am pleased to turn the call over to Keri.

Speaker 3

Thanks, Jason, and we appreciate each of you joining us today. We are pleased to provide an update on the progress that Orisher is making on the 3 pillars of our strategic transformation. That's first, strengthening our foundation next, elevating our core growth and also accelerating profitable growth. A few notable highlights during the quarter include: We generated $57,000,000 of operating cash flow in Q2 and grew our cash balance to $186,000,000 We executed to deliver stronger than anticipated IntelliSwap volumes on our COVID-nineteen contracts During the quarter and in July, we received orders under existing contracts for delivery of additional IntelliSwab devices These orders are expected to generate at least $70,000,000 of revenue in the second half of twenty twenty three. We unlocked incremental cost savings as a part of our ongoing enterprise wide focus on driving improved operating efficiencies.

Speaker 3

We also delivered core revenue growth on both the sequential and a year over year basis. And with our stronger balance sheet, We are investing internally and externally to support and enhance our leadership position and grow in our key portfolios. Rigorous portfolio processes are helping invigorate our innovation roadmap with organic and inorganic opportunities, including strategic partnerships that we believe can provide additional fuel for growth. Next on costs. As we continue to strengthen our foundation, we remain highly focused on delivering greater operating efficiency, including in cost reductions.

Speaker 3

The Q2 reflects a full quarter of impact from the headcount reductions we made in February and we've implemented additional During the quarter, we made progress consolidating our manufacturing facility footprint to drive operating efficiencies, including reassuring some of our capacity to the U. S. To leverage innovative automation capabilities that we have developed. We also continue to make progress on the installation and testing of new equipment and manufacturing processes at our Opus Wave facility In addition to our existing automation production of our OraQuick platform, as discussed in prior quarters, We expect this phase of Opus Way expansion to be completed in 2023. Overall, we expect to generate additional Operating efficiencies across our enterprise in the second half of this year and into 2024, including further consolidation of facilities, leveraging of automation and controlling our non production costs.

Speaker 3

These initiatives, including incorporating Lean 6 Sigma training and methodologies across multiple functions of the company, Support our efforts to breakeven and operating cash flow on our core business by the end of 2024, a target which we remain on track to deliver. Intellisoft volumes were stronger than expected in Q2 And we generated $47,500,000 in revenue from our COVID-nineteen products during the quarter. As I mentioned earlier, we received purchase orders in July under existing contracts for delivery of IntelliSwap devices. Overall, we are really proud of our work with our public health partners and we believe this additional visibility improves readiness for potential infectious disease outbreaks in the U. S.

Speaker 3

And beyond. As we've discussed previously, We also believe the cash generated from IntelliSwap, plus the cost reductions we have implemented, will help us fund investments in innovation and future growth opportunities in order to elevate sustainable growth in our core portfolio. On our core business, which excludes revenue from COVID related products, we grew 4% sequentially this quarter and 3% on a year over year basis. In our HIV franchise, we mentioned during our Q1 earnings call that we saw strong start to the Together Take Me Home program, which is funded by the CDC. This 5 year program focuses on providing program could create additional opportunities for our infectious disease business.

Speaker 3

Moving to hepatitis C. Revenue grew on both a year over year and a sequential basis, driven by strength in domestic segments. We continue to be encouraged by the increasing recognition among health officials of the need to increase HCV surveillance and data collection through outreach testing. Shifting to molecular products, revenue grew 1% sequentially in Q2, representing the 2nd consecutive quarter of modest sequential improvement. While end segments have experienced softness that we've discussed previously, we are seeing some positive signs, including continued momentum in establishing new partnerships and commercial relationships.

Speaker 3

Fundamentally, we believe in the long term potential of molecular testing as an enabler of precision health. On that front, we are very pleased to announce a collaboration to work on a multi year project with the Regeneron Genetics Center, a wholly owned subsidiary of Regeneron Pharmaceuticals Inc. That focuses on early gene discovery and functional genomics. RGC has chosen our Aurigene device for all saliva collection requirements along with leveraging our in house Also in our molecular product portfolio, we continue to make clinical and commercial progress with COLIpi. We recently signed an agreement with the International Vaccine Institute, IBI, to utilize our COLI P Firstvoid volumetric urine collection kits as part of a research study to understand the burden of human papillomavirus, HPV, among girls and women in low and lower middle income countries.

Speaker 3

The International Vaccine Institute is an organization with a mission to discover, develop and deliver safe, effective and affordable vaccines for global health. The study will help inform intervention implementation and prioritization of research and development efforts that have the greatest potential for public health impact. We believe that First Boy urine has the potential to provide powerful insights through non invasive sample collection methods that can transform the approach to HPV patient screening, vaccination and treatment strategies. Regardless of a patient's geographical proximity to or familiarity with professional healthcare settings, Effortless at home sample collection is fundamental to how our offerings can help power the shift in healthcare delivery that connects care with patients and consumers wherever they are. These ongoing and prior studies demonstrate the value of COLI P urine collection as an easy to use non invasive self sampling device and OraSure is committed to delivering an evidence based Affordable solution with improved patient experience for people around the globe.

Speaker 3

Microbiome is another emerging science that has potential to contribute to Precision Health Innovation. Our microbiome collection devices and services are used to advance research, direct to consumer and clinical applications in the space. Of note is the Pioneering work done by our biotech customers to leverage the power of the microbiome in developing new therapeutics. One such customer is Seres Therapeutics. Seres, a commercial stage company developing novel microbiome therapeutics and Nestle Health Science, a leader in the science of nutrition, have jointly announced the FDA approval of the 1st and only Orally administered microbiota based therapeutic, Voust, to prevent recurrence of C.

Speaker 3

Difficile infection, or CDI, in adults following antibacterial treatments for recurrent C. Diff infection. The FDA approval of Vals was supported by a robust Phase 3 development program that included the ECOSPOR III and ECOSPOR IV studies. Forrester's subsidiary, Diversigen, provided the microbiome sequencing services for this series of studies and are pleased to see the FDA approval for this important new oral treatment option for C. Diff infection.

Speaker 3

On our innovation roadmap, in addition to our current product portfolio, We continue to make progress on our initiatives to accelerate profitable growth through investments in our internal product development pipeline as well as potential external investments, partnerships and acquisitions enabled by the strengthening of our balance sheets during the last year. We have discussed in prior quarters that in diagnostics, we are working on opportunities to expand our portfolio of assays in areas where we have existing strong capabilities such as in infectious disease, respiratory, influenza and sexual health. We expect to share more on these opportunities later this year. In Molecular, over the past few quarters, we have shared our progress in new collaborations in Precision Health. It's great to see those partners such as Quest Diagnostics, Grifols and ZWIG launching their new offerings across a broad range of use cases such as consumer initiated testing and genetic counseling services as well as disease specific testing.

Speaker 3

Overall, we believe OraSure is well positioned to be the partner of choice to help power Precision Health due to several important differentiators. 1, the quality and reliability of our offerings and the expanded patient reach they enable 2, the consistency of our delivery and execution and 3, our track record of collaborating with our partners and successfully navigating complex regulatory approval processes for segment access and expansion. With that, I'd like to turn the call over to Ken to discuss our financial results and guidance.

Speaker 2

Thanks, Carrie. I'm happy to discuss our financial results for the Q2 of 2023 and provide updates on our financial outlook. We delivered total revenue of $84,500,000 in Q2, representing 6% year over year growth. COVID-nineteen products, including Intelliswap contributed $47,500,000 of revenue in the 2nd quarter and grew 10% on a year over year basis. Purchasing patterns under our contracts with the federal government were stronger than expected during the quarter.

Speaker 2

Total core revenue, which excludes COVID products, was $37,900,000 in the 2nd quarter, representing 4% sequential growth and 3% year over year growth. Within core revenue, our core diagnostic products generated $19,800,000 in Q2 and grew 41% year over year. The strong growth was driven by significant domestic HIV sales bolstered by the Together Take Me Home program as well as growth in international HIV sales. Looking at our core molecular products, Total revenue of $13,100,000 decreased 26% year over year. On a sequential basis, Electrolux revenue grew 1%.

Speaker 2

As we expected, we continue to see muted person patterns from a few large customers during the quarter. That said, we are seeing some signs of stabilization with current customers as well as opportunities in new areas. From a gross margin perspective, our GAAP gross margin in the 2nd quarter was 30.9%. GAAP gross margin declined significantly compared to the prior quarter, which was primarily attributable to the impact of accelerated depreciation and inventory reserves related to the wind down of our manufacturing operations in Thailand. Non GAAP gross margin was 42% in the 2nd quarter and declined slightly compared to the prior quarter, which was previewed last call.

Speaker 2

The decline was primarily attributable to the fact that a large portion of our Intelliswap volumes during Q2 and through our contract with a lower selling price. The impact of this pricing headwind was partially offset by savings from Intellisoft packaging redesign that we discussed in prior quarters, as well as other cost reductions we've implemented this year. Looking ahead, we are focused on driving efficiencies across our entire portfolio of products and services, including site consolidation, Product standardization, 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 $32,800,000 which decreased by $8,700,000 compared to Q1.

Speaker 2

Our non GAAP operating expenses were $29,100,000 in Q2, which decreased by $4,500,000 compared to Q1, primarily due to our headcount reductions in February. We are focused on driving additional efficiencies in our non production expenses in the coming quarters. These savings are important As we look to utilize cash for growth investments and as we are committed to achieving breakeven operating cash flow in our core business by the end of 2024. This quarter, our GAAP operating income was a loss of $6,400,000 which compares to GAAP operating loss of $21,500,000 in last year's Q2. Non GAAP operating income was a positive $6,700,000 in the 2nd quarter.

Speaker 2

Non GAAP operating income in last year's Q2 was a loss of 1,200,000 We ended the quarter with 0 debt and total cash and cash equivalents of $186,000,000 which is up from $112,000,000 last quarter. The increase in our cash balance was primarily driven by strong collections on accounts receivable as well as receipt of $18,000,000 from the U. S. Department of Defense related to the achievement of milestones at our Opus Way facility. The majority of the cash The expenditures tied to this expansion have been completed and we have $31,000,000 remaining in milestone payments from the government.

Speaker 2

Turning to guidance. We are guiding to 3rd quarter revenue of $72,000,000 to $77,000,000 which includes core revenue of $37,000,000 to $39,000,000 and Intellislab revenue of $35,000,000 to $38,000,000 As Carrie discussed, in July, we received purchase orders under one of our existing contracts with the federal government for delivery of IntelliSwap devices. These orders are expected to contribute at least $70,000,000 of revenue in the second half of twenty twenty three. Additionally, as part of our ongoing focus on enterprise wide operating efficiency, we are on track to exceed the $15,000,000 of annualized cost savings announced in Q1 2023. With that, I'll turn the call back over to Teri to conclude.

Speaker 3

Thanks, Ken. And just to clarify, our 2nd quarter revenue was $85,400,000 not 84.5 And in summary, during the Q2, we delivered significant progress on our strategic priorities. We strengthened our foundation by generating significant positive cash flow and continued driving operating efficiencies, discipline and accountability across our enterprise while executing on our Intelliswap contract. We delivered positive core growth, which was due to the dedication of our team members providing value for our customers, partners and patients. And we continue to make investments to strengthen and the leadership position of our products and services in order to accelerate our profitable growth in the coming years.

Speaker 3

Overall, we are confident that OraSure's foundational capabilities and current strength position us for success as we aim to help power the shift in healthcare delivery, meeting people, patients where they are to increase access, affordability and quality of care. With that, I'm happy to turn the call back to the operator for Q and A. Operator?

Operator

Thank you. Our first question comes from Patrick Donnelly with Citi. Your line is open.

Speaker 4

This is Brendan on for Patrick. Congrats on the quarter. First off, I apologize if you guys are doing Opus, but I wonder if we can go over the cadence for the second half of the year for the IntelliSwap revenue. So I know you said that there were around $70,000,000 of new orders left and around $30,000,000 left in your older contracts. How should we think about that in the second half of the year?

Speaker 2

Yes. So our guidance and thank you for the question. Our guidance for second half is $70,000,000 of IntelliSpark revenue. And then what we guided in our guidance for the Q3 It was $35,000,000 to $38,000,000 right? So you can imagine the other $35,000,000 for Q4 as we go forward.

Speaker 2

Does that the rest of your question there?

Speaker 4

Yes. Thank you. And then one follow-up. For the Let's Stop HIV Together program, I know you guys talked about that Program expanding. I wonder if there have been any movement in possible expansion of that program and when may we see that?

Speaker 2

Yes, we continue to have great relationships with the CDC when it comes to this program. And we've had a lot of success where they want to continue it in a time to potentially accelerate it as we go forward. So we're really pleased with the efforts. And what they're learning there is the importance of this channel To get out to underserved populations as we go forward.

Speaker 3

So I'd just say off to a really good start And we will continue to update everyone on the strength of HIV in the core. But We do think that the momentum of that program has potential to help our infectious disease business overall as we're reaching Yes, underserved populations and really increasing access to the HIV diagnostic.

Speaker 4

Great. Thank you so much. Congrats again on the quarter.

Speaker 3

Thanks, Brandon.

Operator

One moment for our next question. Our next question comes from Jacob Johnson with Stephens, your line is open.

Speaker 5

Great, everybody. Maybe Ken, just first on the Q3 guidance. The base business Revenues grew sequentially this quarter, but if my math's right, I think the Q3 guidance implies the base business is kind of flat to down a bit. Can Can you just talk about anything we need to consider from a seasonal perspective as we're thinking about the base business in

Speaker 2

the Q3? Yes, we did to your point, we saw a very strong Q2 in some of our lines of business. We are expecting we feel in the molecular business, We did see some solid stabilization in the core in the business. And as far as diagnostics, We are seeing some strong growth, what we saw in Q2 around our domestic and international business. We believe that, again, the molecular, we are maintaining that stabilized position, as well as in diagnostics business.

Speaker 3

Yes. So it is flat. We're sort of guiding in that flat to sort of slight growth range.

Speaker 5

Okay. Makes sense. And then, Carey, maybe just on molecular products. You've talked about some of the headwinds you faced there, but you've announced a variety of partnerships as it relates to That segment, can you just talk about how we should think about the revenue contribution from these partnerships, maybe kind of near term versus long term and what the ramp Some of those relationships could look like?

Speaker 3

Yes. As we continue to say, we believe in the long term Potential of molecular and that it really is a foundation for Precision Health. While we don't call out some specific guidance, I think What we've been trying to do is show the momentum where molecular collection is increasingly expanding from what has been kind of a direct to consumer historic in the clinical space and into other applications Where again, Jacob, we will share more specifically as we have it. But fundamentally, I think think about that as this increasing pipeline of opportunity that as molecular end markets, You see those recoveries that we fully expect to grow with those end markets as they grow. So good news across the board and I think we're all looking for those continuous signs of recovery with the big players and you know who they are.

Speaker 5

Got it. All right. I'll leave it there. Thanks for taking the questions, Carrie.

Speaker 3

Thanks, Jacob.

Operator

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

Speaker 6

Thanks. This is Matt on for Brandon. Maybe one for you, Ken. Gross margins at 42% in the quarter, down slightly as you previously Talking about due to the IntelliSwap mix. Curious how that 42% came in relative to your expectations or any of the tailwinds you called out The cost reduction, the package redesign freight costs better than expected in the quarter.

Speaker 6

And then any color on how to think about gross margins here either in 3Q for the back half of the year. And you listed some additional efficiencies you're kind of focused on. Will those show up here in the back half or are those more, 'twenty four and beyond benefits? Thanks.

Speaker 2

Great question. I hope I'll get the earlier answers here. Yes, so for Q2, we did see better than expected margins. It came from 2 areas as you described. We had earlier implementation of our Version 2 packaging Where we saw a better benefit than expected.

Speaker 2

In addition, what we saw was a better mix or a stronger mix and stronger volume for our teleslaw business, Which drove it. Going forward, we do expect the IntelliSwap volume going forward And the remaining volume to be at the higher price, I think we quoted in the past about a $5 price, and we expect that Going forward, so that should see a solid improvement to our margins. As well as what you described, we're seeing improvement from the efficiencies we put in place, Whether it's the packaging efficiencies, operational efficiencies, the footprint consolidations efficiencies, Kerry mentioned the reshoring of our High land facility into our Opus Way as well as driving automation and leveraging automation, not just on IntelliSpa, but leveraging on our other segments and other platforms.

Speaker 6

That's helpful. And excellent one for you, Ken. You guys ended the quarter with $186,000,000 of cash. I think you've previously talked about some working capital benefits as we move through the year Around the teleslaw both from an inventory standpoint and then accounts receivable that were in total north of $100,000,000 Obviously, AR, saw a pretty big swing here in the quarter. Inventory is relatively flat.

Speaker 6

Do you expect to still see that full unwind and the benefit from that to cash? Or is there some change Just given this $70,000,000 of order and maybe how you're thinking about inventory for Intellisoft here in the back half of the year and maybe even into 'twenty four? Thanks.

Speaker 2

Yes, great question and thanks for asking that. Yes, so in Q2, we saw 3 areas through the hard work of the team improve. We saw, like you said, an improvement in accounts receivable, a slight improvement in inventory and then we got some milestone payments From the government to the hard work of the team, we expect to see those areas improve Yes, going forward in the second half as well. We expect to continue to receive of our remaining accounts receivable, still a big portion of it is Intelliswap related and As well as we expect to see inventory drawdown as we go forward in second half. And then we do expect to have, we mentioned about $31,000,000 of remaining milestone payments related to the government.

Speaker 2

And We have spent most of the expenses related to that program. So now it's a matter of proving it out and getting government approval for those milestones and then receiving those payments.

Speaker 4

Thanks. And then just

Speaker 6

one last quick one. I think you guys said on the incremental Intelsat orders, it said at least $70,000,000 Should we think about that as a floor and is it possible that there could be potential upside to that moving to the back half of the year? Thank you.

Speaker 2

Yes, great question. And the way we're looking at it is that's what we have visibility to right now. You can imagine there's sometimes seasonal ordering patterns that could change that. So we wanted to provide a number that we have visibility to for this time for the second half. And as you can in our guidance you saw, we split that roughly evenly Between Q3 and Q4.

Speaker 6

Super. I'll leave it there. Thank you.

Operator

I'm showing no further questions at this time. I would like to Turn the call back to Keri Eglington Manor for closing remarks.

Speaker 3

Great. Thank you. We appreciate Everyone participating in our call today, we appreciate your continued interest in OraSure and We'll talk to you next quarter. Thank you.

Operator

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

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OraSure Technologies Q2 2023
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