OraSure Technologies, Inc. (NASDAQ:OSUR) Q1 2023 Earnings Call Transcript May 10, 2023

OraSure Technologies, Inc. beats earnings expectations. Reported EPS is $0.37, expectations were $0.14.

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 [Operator Instructions]. 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: 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: 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 road map 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, in order 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 the 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. InteliSwab 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 InteliSwab 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 outbreak.

They utilize previously appropriated funds existing InteliSwab contracts. Part of these discussions includes the potential to extend the timeframe under which orders for test could be fulfilled similar to what occurred last year. The cash generated from InteliSwab, 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. And 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 HIV — HCV, sorry, we are also encouraged by the recent White House plan to eliminate HCV, which was highlighted in a recent JAMA article by Dr. Francis Collins, the former Head of the National Institute of Health. Unitaid also made a $31 million investment in preventing HCV and 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, aligned with our strength in both our product offerings themselves as well as in our distribution for two important sexually transmitted infections that affect at-risk population.

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 at 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 this. 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.

And I mentioned this, our partnership supporting Quest, Genomic Sequencing Services Group, test offerings and our collaboration with Grifols that supports alpha-1 testing for patients at risk for COPD and other lung disorders. Also on 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 have authorized the manuscript that has just been accepted for publication in a period viewed journal entitled and 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 sample, self-collected first void urine using our Colli-Pee device and self-collected vaginal flows in 10,000 women who are eligible for the NHS cervical screening program.

Notably, the study concluded that cell sampling for routine HPV cervical cancer screening with 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 complement 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 test 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 and point of care and self-test diagnostics in sample collection and stabilization and in our services 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, well position 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: 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 with 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 being that the preponderance of tests could fall under our lower-priced contract which means that 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 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 InteliSwab 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 as we are committed to achieve cash flow breakeven in our core business, excluding InteliSwab 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 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 InteliSwab revenues paper 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 recruit 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 InteliSwab revenue of $25 million to $30 million in the second quarter versus $118 million in sales we saw in the first quarter. As Carrier discussed earlier, we are in ongoing discussions with the government. Consequently, we are guiding to a total second quarter revenues of $62 million to $67 million.

Our goal with InteliSwab has been to optimize cash generation for future growth investments. And 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: Thanks, Ken. And 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 in order to deliver shareholder value. We are highly focused on continuing to improve organizational, structural and manufacturing efficiencies, optimizing the InteliSwab 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 health care delivery, meeting people, 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: 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 and share a broad participation.

Q&A Session

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

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

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

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

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

Carrie Manner: 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: Great. Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.