Q3 2021 OraSure Technologies Inc Earnings Call
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Why cause they are asked her technologies incorporated 20th 21 third quarter earnings Conference call. My name is Adrian and Nappier I paid her for today's call.
At this time all participants are in a listen only mode. Later will conduct a question and answer session. During the question and answer session. If you have a question. Please crestar then one on your Touchtone phone and I'll turn the caller was Scott Glistening Grimness T F O strictly snead may begin.
Good afternoon, and welcome to the New Yorker Scalzi.
Quarter of 2021 already Paul I am.
The interim CFO and FCP of Investor Relations and communication.
Then he left me today from workers Doctor, Stephen paying our President and Chief Executive Officer. As a reminder, today's webcast is being recorded and a recording along with the presentation of stopping the webcast can be found our investor relations website.
Before we ate again, you should know that this call may contain certain forward looking statements, including statements with respect to revenue expensive profitability earnings or loss per share and other financial performance product development.
Foreman shipments.
Shipments in markets business plans regulatory filings and approval expectations and strategy actual results could be significantly different factors that could affect results are discussed more fully in the company's SEC filings inclusion it's registration statements and reports on Form 10-K for the year ended December 31 2020.
Its quarterly report on Form 10-Q, and if other SEC filings.
Although forward looking statements help provide complete information about the prospects.
Listeners should keep in mind that forward looking statements are based solely off 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 Doctor <unk>.
Thanks, Scott and thank you to everyone for joining us on the call today.
This quarter horse or once again delivered strong topline performance with sales of our core product sprawling 37% year over year.
As an organization, we began setting the stage for even more rapid growth as we look forward to fiscal year 2022.
The global pandemic is providing the impetus to fundamentally transform our company into a higher growth and more innovative organization with broader customer reach both within and outside the United States.
Perhaps as importantly, what we call effortless diagnostics, which are diagnostic products from collection kits that are so simple in design that can be used in any setting are having a watershed moment.
Consumers health care workers and regulators are seeing the power of these tests can have on addressing our greatest public health challenges.
We see significant opportunity to capitalize on these trends and utilize until slob gross permanently enhance our operational profile are competitive positioning through investments in automation inefficiency.
We were increasingly talk about these plans as we transition into fiscal year 2022.
We remain highly focus on executing on our strategic priorities, including capitalizing on COVID-19 testing opportunity.
Expanding our sample collection in molecular services businesses.
And even further in support of our multi omics discovery and diagnostics, expanding our global reach and driving innovation with a focus on achieving higher growth for both internal already and M&A.
I would now like to discuss our progress in each of these areas.
First as we look to the COVID-19 testing opportunity. We are convinced of COVID-19 testing will be an integral part of our business over the long term.
Internal and external market models project testing demand based on vaccination rates epidemiology and forecast a slow taper disease incidence and testing over the next five years.
Coupled with recent discussions with the federal government and Fortune 500 employers we are increasingly convinced of the durability of our <unk>.
Tell us well as a product for the company.
And as you can see on slide five alright, but Amy logical base model forecast a global testing market of approximately 1.1 billion rapid test by 2025.
Rapid COVID-19 image of tests, especially extremely easy to use tests, such as Intel swap are having a breakthrough in the United States.
The ability to rapidly assess disease status outside of health care settings, fine entrained user has proven to be a critical tool and counting the pandemic and this is an area where or sure has a long history and expertise.
In this quarter alone we received over $400 million customer orders clothing goes from major commercial retailers, such as Walgreens in Walmart and other major retail customers, which we had to turn away due to manufacturing constraints.
We've also had received orders and inquiries from multiple fortune 500 companies major health care systems, and numerous entertainment and hospitality customers.
You may have even noticed singer Sheryl Crow tweeting about they use it a total slob with her torn team.
We're currently I'm in a position where we can sell every test we can manufacture and believe this paradigm will persist into at least fiscal year 2022.
This quarter. We also signed three major U S government contracts that are transformational for the company as we look to the future.
The first is a 205 billion dollar procurement contract from the defense Logistics agency for Intel swap over the counter test. This contract is strategically important for the company and we bid aggressively to ensure we would win a significant portion of this business for several reasons.
First this contract will essentially fill the factory for sure in fiscal year, 2022, providing meaningful six cost absorption and ensuring with generate significant free cash flow, which we can reinvest in growth and utilize to further expand our war chest for strategic mergers and acquisitions.
Importantly, given this fixed costs absorption the contribution margin on additional testing beyond the government contract will be higher.
Second as part of the contract we will ship product to up to 25000 customers across the United States, expanding our customer interactions and enabling even more consumerist experienced the simplicity of testing that only and tell us while I can provide.
The second major contract. We received was 109 million dollar contract with the department of defense to expand our manufacturing capacity foreign tell us what.
This contract further integrates us as part of the government's pandemic response program will increase our annual capacity for Intel smiled tests production to 200 million tests by early 2024.
Under this contract the capital equipment investments installation and validation work will be funded by the government, thereby increasing our ability to supply and tell us lab tests and improving our long term cost structure.
Finally, we will receive up to $13.6 million from the biomedical Advanced Research development authority to fund or additional clinical studies, an application for F. D. A five 10-K clearance and clear waiver for Intel swap.
Once received these full regulatory clearances, one sure that and tell us what remains commercially available longterm, even after the pandemic is declared over an emergency use authorization or no longer allowed.
We also received a label claim expansion from the F. D. A as it pertains to run and tell US why I'm COVID-19, rapid test or the F. D. A revise the over the counter indication, enabling everyone was symptoms to all of US one test to determine if they have COVID-19.
Those without symptoms will still be directed to test twice within 24 to 36 hours if that first test is negative.
In addition, we have submitted to the F D. A to expand our age range across all of our E. Ways to include children Ages two to 14. In addition to our prior authorizations for 815 and.
Correct. He agreed upon protocols, we conducted both pediatric specific usability and clinical study is to ensure acceptability and performance in this population.
We are now waiting F D. A review of this data.
All submitted for Authorisation of our new reporting up and tell us why would connect which can be used by communities schools and businesses to record save a report the results to public health.
Finally, we conducted studies with live Delta and Blanda variance in two independent labs and detected both variance in addition to alpha beta and gamma variance from prior studies.
Well I believe the preponderance over and tell us Bob revenues in fiscal year 2022 will be domestic.
Our long range plan has increased contribution from international markets overtime.
In fiscal year 2022, we were planning to conduct studies to support the C. Mark from tell us off with a configuration most appropriate for countries outside the United States.
Finally, we are continuing to make progress on our manufacturing scaleup foreign tell us well, but are behind where we would hope to be from a test production standpoint.
Despite the challenges we are facing we continue to believe we are on track to generate approximately $30 million in total until a swab revenue for this year.
We believe we've isolated the scaleup challenges to be primarily caused by variability in certain raw materials and processing steps.
And we are currently working with vendors and third party experts that she Ah resolution.
Importantly, as we look to January of next year. We believe we are on track to scale to greater than 4 million to tell us about the test per month, which is our current installed capacity assuming resolution of the manufacturing process.
However, given timelines to pack tests and to finish O. T. C. Two packets are sales run rate will likely be below this level for the first quarter.
We continue to anticipate being an annual production levels of approximately 8 million and tell US lab tests per month by June and are looking at more ways to rapidly scale and supply significant mark demand that currently exist.
Next I would like to discuss on my recent internal innovation and highlight our work and expanding sample coverage and analytical services. It's part of our multi on my vision.
And the first quarter of next year, we expect to launch a new got better transcript down collection kit and.
And related service offerings for diversity subsidiary.
Those you that don't know the meta transcriptome looks at Jim level expressions that crossed the genome in this case the Medici now.
Our pharmaceutical research customers have been highly interested in this technology, which we believe will expand our current microbiome offerings and provide a new avenue for growth and both collection kits and services.
We continually evaluate new opportunities to introduce new collection kits and services and support of our vision, enabling multi omics discoveries and diagnostics.
On that note.
In the first half of fiscal year 2022, we plan to take a step forward and on microbiome program and lost the first F. D. A cleared collection kit forgot microbiome.
We have submitted our application for this product to the FDA and are waiting regulatory approval.
This innovation will support our commercial customers as they seek to launch clinical assays based on the microbiome or want the reliability of an F. D. A cleared device in their therapeutic development programs.
Additionally, we're looking at our caller P. First for your collection device, we've seen the commercial interest following the publication of data demonstrating similar sensitivity and specificity with policy to clinician collected cervical samples using abbott's realtime high risk human papillomavirus essay for the detection of pleasure.
We plan to per cent and publish additional datasets with other major H P V test manufacturers in the first half of fiscal year 2022.
To support further applications that <unk>, we were watching a new research use only chemistry to stabilize analyze and urine critical oncology applications, such as like with biopsy. This.
This will allow us access to additional hydro segments of the account to market.
Moving onto our strategy to expand our global reach and presence we continue to see strong adoption of our Oraquick H I V tests internationally, driven by the double digit annual growth since 2016, Oh for HIV self test the only C E market World Health organization pre qualified for also itself test for HIV in the word.
<unk>.
And as we look forward to 2023 and tell us what could become our largest international products and could provide the impetus for further international expansion and new customer relationships outside the United States.
For a legacy business, we continued to expand our global reach and now have over 445 product registrations in 98 countries.
These efforts were aided this quarter with a receipt of our Thailand pre sale certificate for Oraquick H I V self test.
This wasn't important certification, which now enables us to obtain registrations and sell our tests and a number of Latin American and Asian countries.
With our molecular question gets business, we have identified eight target countries predominantly in Europe, and Asia, where we see an ongoing demand for P. C. R testing and an opportunity for expanded use of our products.
We plan to make broader inroads internationally with our question because business in the coming years.
Finally, I'd like to discuss our strategic priority of driving innovation with a focus on higher growth spaces through internal research and development and mergers and acquisitions.
Now that we have successfully launched and tell us what which was a major R&D undertaken we're planning on investing more heavily research development to build our internal product development capabilities.
We have a number of products with publicly spoken about including novel New point of care tests to determine medication to hearings for prep and anti retroviral drugs from our you're sure acquisition last summer.
The launch of a C E Mark H I V or a flu itself test in Europe are.
<unk> research collaborations with major diagnostic manufacturers and human papillomavirus, and other sexually transmitted diseases and our upcoming got met a transcript on collection kits and diversity in service lunch.
Beyond these initiatives, we have other pipeline development projects, we will look at to showcase in future investor events.
I'm, an external business development standpoint, we are highly focused and currently engaged in evaluating a number of potential opportunities.
One area of the strategic interests is to find the next generation platform for a broad expansion into what we call effortless diagnostics, we've seen the market increasingly translation 20 care testing and these trends have only begun to accelerate during the pandemic.
We are currently in discussions with a number of companies, which Willie could increase a customer value proposition around a diagnostic products and facilitate brought her test menu expansion.
We continue to evaluate technology and product Adjacencies that would complement our molecular solutions businesses and facilitate a strategy of enabling multi omics through expanded kit service and data integration offerings.
The global Pandemics provided orser with the opportunity to fundamentally transformed the company spur innovation invest for growth and increase our efficiency as an organization.
Updated our strategic plan and we believe our plane will position or short to unlock shareholder value in the coming years, we look forward to sharing key elements of this plan for the investment community and the first half of 2022.
With that I'd like to turn the call over to Scott to address our financial results and outlook.
Thanks, Steve and please discuss our financial results for the third quarter and provide updates on our financial outlook.
First from a topline perspective, we deliver total revenue of $53.9 million in the third quarter of 2021 compared to $48 million in the prior year.
Representing a year over year growth of 12%.
It could be COVID-19 revenue, our core business for 37 per cent and a quarter to over $40 million, reflecting a continuation of the song growth trends, we saw last quarter.
This quarter, we had record diagnostic revenue, which was 23.5 million versus $16.3 million in the previous year, reflecting 44% growth.
Just broke was driven primarily by <unk>.
Are HIV business with relatively flat of a year year over year for two reasons.
First the Bill and Melinda Gates Foundation subsidy for our international HIV test business expired in the second quarter, which negatively impacted revenue. Despite test volume grew up on a year over year basis.
Secondly, we continue to see logistical issues with shipping and with our NGO partners in Africa, which impacted international HIV fail have COVID-19, spike in much of Africa and Asia This quarter we.
We anticipate some improvement on this front in the fourth quarter.
In terms of domestic HIV Taffy there was a recent publication, which results from the center for disease control take me home program, where our Oraquick HIV test or shipped directly to consumers.
30 found a 37% of the high risk consumers receiving a test had never been tested at all in the past and 56% had not been tested for HIV in the last year.
Data was very positive received and we are optimistic that it could lead to further utilization of home HIV salt testing.
As a reminder, artwork like oral fluid HIV test is the only over the counter spelt test for HIV in the United States and required significant studies to get gain at the GMA approval. This.
We also continue to see strong growth in our HCV and drug abuse happening businesses based predominantly on a recovery and testing from the impact of a pandemic.
Finally, we have stronger than anticipated and tell us what revenue in the quarter at 7.7 million predominantly.
Upon better than forecast the test pricey.
As we stated last quarter, we have seen exceptionally strong customer demand for Intel swap and we can sell every test we can manufacture sort of performance depends on our ability to produce tests.
Steve mentioned earlier in the call. We are wrapping production on a weekly basis, but remain constrained Iraq material available their ability and processing issues.
For the year, we are anticipating approximately 30 million into a tall is Barbara Avenue and our goal is to have our production capacity match her installed capacity early in the first quarter.
Given demand levels, you're also evaluating ways to further accelerate our production capacity.
Looking at them like your solutions business total third quarter revenue was 30.4 million and declined 4% from the same period last year.
The decline was entirely driven by lower sales of our market a collection kit for COVID-19, caffeine at $6.3 million and a quarter versus $18.8 million in the same period of the prior year as customers experience lower PCR testing level due to vaccination rate and an increasingly available at point of care rapid advantage of tests.
Excluding COVID-19 testing electric solutions revenue grew 87% year over year, driven by an ongoing rebound and research and clinical market as well as an accelerated or in patterns of seasonal customers.
To ensure product availability for holiday promotions.
We continue to take a conservative outlook for the COVID-19 electric flexion kitten business, but it is possible we could see a step up a revenue in the fourth quarter and some of our customers resume back to school and workplace testing programs.
Microbiome services revenue in the quarter with 2.4 million and grew 6% year over year.
Revenue this quarter was negatively impacted by the timing of our pharmaceutical partner contracts. However, we are anticipating a strong fourth quarter.
Turning to gross margins are gross margin percentage in the third quarter with 39, 8% compared to 63.1% in the same period last year the.
The decline in overall gross margin this quarter was primarily due to our production scale up for Intel shop, as our equipment and labor was utilized inefficiently relative to revenue base this quarter firm indulge Bob.
He also had materials craft rate higher than we anticipate in the future as we streamline our production process and we are seeing a negative impact on all of our products, including a toss one from the higher shipping costs associated with the global supply chain crisis.
We also thought detrimental gross margin impact in the quarter on a year over year basis from product and customer mix and the expiration of the bill and Melinda gates subsidy.
We also had a 1.8 million reserve on inventory this quarter related to our all fluid antibody test, where we had built inventory in anticipation of an ebay and it was strong that application to focus on research you sail can the antibody testing market for COVID-19.
Looking forward to 2022 are gross margins are operating margins will be impacted by the large government procurement contract for an <unk>.
Price the government contract to have an attractive operating margin, but the gross margins on this business will be significantly below our historical gross margins for the company.
Theocratic margins include are incremental shipping hot which will be significant under the contract due to the fact that it requires potential shipment of low volume that persistent chapter 25000 customers in the.
This was done strategically to ensure we would be well positioned to win a significant part of the contract and knowing that from an operating profit standpoint, we will not incur significant additional expenses beyond our manufacturing and shipping costs.
Importantly, this contract will very accurate for next year and makes a contribution on the remaining business higher.
From the expense standpoint, total operating better than the quarter with 34.5 million compared to $25.9 million in the third quarter of last year.
Higher expenses and a quarter, we're predominantly attributable to higher sales and marketing with our new Intel Schwab lunch and expenses associated with our strategic review.
In the quarter, we had an operating loss of $13 million compared to an operating profit at $4.4 million in the third quarter of 2020.
We expect them once again generate a negative operating income and the fiscal fourth quarter due to production inefficiencies and are scaling of the and tell us what business and then transition to a meaningful operating profit in fiscal year 2022.
Moving to the bottom line regenerated locked.
Locker share of 21 cent.
And the third quarter of this year compared to a net profit of one cent per share in the same quarter last year.
Looking at our financial outlook, we are raising our financial guidance for the year and are now anticipating total revenue of 230 million to $233 million versus our prior guidance, which called for full year revenues of approximately $239.
Isn't by a fourth quarter revenue of $60 million to $63 million.
Looking at four key revenue.
Acting lower sales of molecular question, just due to the timing of orders and some of our larger consumer testing customers.
From makes sense of perspective, we expect gross margin to once again be similar to what we saw the third quarter due to a continuation of the issues. We previously discussed.
We are also anticipating higher operating expenses.
Several of our ongoing completed and tell us what post marketing and clinical studies will lead to higher R&D expensive in the fourth quarter. We also expect higher SG&A Panthers as we prepare for this or that and it became commercial ramp for our business and fiscal year 2022.
While we are in a transfer a period here, we are well positioned as we look to next year to significantly scale, our revenue base, which will facilitate further investment by the company and growth initiatives.
With that I'm pleased to turn the call back over to see.
Thanks, Scott our goal all along has to emerge from the pandemic is a larger and faster growing company.
We strongly believe that the tailwind behind it tell us Bob revenue is longer than most investors give us credit for and will facilitate significant growth investment in the organization in the coming years.
We also see additional tangible benefits such as a growing our customer base, expanding our global reach into new markets and demonstrating the significant clinical importance of effortless diagnostics and empower consumers and health care workers or expertise in this area positions exceptionally well for the health care market of the future with that I'd.
Like to turn the call back over to Scott for Q&A.
Thank the operator, we're now ready to begin to Q&A portion of the call. We would ask that you limit your questions to one question and one follow up to ensure it rod participation.
Thank you well now begin the question answered.
If you have a question please.
And one on your touch downtown.
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And our first question constant <unk> may have recording your line is hoping.
Hi, This is Kevin on four D J and thanks for taking the question looking.
Looking at guidance for four Q guide seems to imply a decline in base business across excluding COVID-19 considering volumes and utilization is normalizing what is causing the decline and can you just walk us through the assumptions for <unk> guidance.
<unk>.
Yeah. Thanks for the question Kevin This is Scott.
There are a couple of factors when we look at the fourth quarter and there'll be mentioned on the call and they're really driving that sequential change in the in the core business you know the the first one is when we look at the like your kids business. Some of our larger more consumer focused customers. There uhm changed the timing of some of their ordering.
That's where they took more products in the third quarter.
And so we would anticipate that that portion of the business being down in the fourth quarter.
The second factor is this when you look at the Covid molecular collection kits and we are modeling that business being down sequentially.
As I stated on the call that's essentially a conservative assumption given some of the conversations we've had with our customers. So we feel it's prudent right now just given what we know in terms of the outlet. It can so those are really the two factors outside of and tell us while they're driving out of the coffees.
Downwards on a sequential basis.
The changes you another question.
No. That's that's it. Thank you okay. Thank you.
And today's question cause any anti Cooper Raymond changed your line is nothing.
Hey, guys. Thanks for the questions, maybe first just thinking about sort of the the capacity ramps and what's going on there you know previously we talked about technology transfer an hour. We're hearing about some new things in terms of the incoming raw materials and the processing steps. So are these related or are these kind of new challenges and can you just give us a little bit more flavor.
For what these issues are and how you can go about resolving them and how quick that can actually occur.
Yeah, certainly enter it Steve these are not different problems and what we expressed after our call in August for the second quarter.
What we've been doing is narrowing down the factors effectively and that's why we would express them today in terms of certain raw materials and processing stuff. So we are successfully work the list of potential issues down to a small number and I think when you can read into this is first of all.
We're not happy with the situation.
We're not we're doing everything we can to resolve it as quickly as possible. Many people are working 24 seven on this.
But obviously when you leave $400 million in customer orders on the table and not able to fulfill them that that is highly disappointing cause I want to say that up front, having said that when we provided our guidance for the fourth quarter $30 million in and tell US love sales for 2021 and.
Looked at the ramp to 4 million tests per month in the first quarter of next year and I'm moving to 8 million tests per month by June all that has built in and expectations for the ramp up from here. So.
So, it's not where it needs to be the day, clearly, but I think we see the path forward from here, we understand the issues. We've got an experts from our equipment manufacturers additional expertise in engineering level slow technology. So we are on it I think we're very close to to having this.
Fully resolved in the near future.
Okay helpful and then.
No Andrew I think the only thing.
Add that you know it's important to understand that we are scaling on a weekly basis, it's just not quite yet at the rate that we want it to be a bit at this point.
Understood understood. Okay, and then maybe as a as it related follow up and then I'll stop just as we think about the government contract in terms of you know the the.
The big purchase order and that volume or that capacity that you're expecting to reach you know it doesn't necessarily leave a ton to try to I kind of slack to hit the full $205 million purchase.
How do we think about maybe timing of the shipments there and then what's left.
To necessarily go out to you know the more kind of traditional market. How do we think about what the mix might look like from that perspective.
Yeah, Andrew So we received orders from the government on a weekly basis.
And we're working the product mix some real time here, but I think we think we've shared previously the preponderance of the government orders are gonna be in 2022, So we're just starting with them.
And the government has actually been very responsive to our needs to supply commercial customers.
Part of the 400 million dollar and customer order demand that we cited in our call.
Are not only driven by retailers like Walgreens and Walmart's, but there are a large portion 500 employers or buying in bulk for testing and programs probably in anticipation of the department of labor and Osha regulations, which will come on stream fairly soon so I think we can work the product mix in a way that's.
That's favorable to our our bottom line and that's a discussion we have with the government every week.
Okay, Great I'll stop there I know, we went to eliminate them I hop in Mirc at the end.
Thank you.
Thanks, Andrew.
And the next question.
<unk> <unk> from Jeffries can I ended up in.
Hey, guys, it's Matt on for Brandon just wanted to add one on the M&A pipeline. Stephen you noted your evaluate any number of opportunities, especially in the area of next Gen. Diagnostics I think you coined it uhm effortless diagnostics just add a little more color on the pipeline today, if it's a little bit more actionable then maybe it has been.
In the past and then as we think about any potential deals kind of talk about you know more tuck ins, where you can build out the menu over time for something that could be potentially more transformative. Thank you.
Yeah, certainly certainly on that so we've been talking about the deal flow for some time, and obviously that changes depending on the circumstances and willing sellers, let me put it that way today I think we'd never seen a more robust pipeline that we have for the rest of.
Of the year and you're absolutely right, we have called out effortless diagnostics and next generation platforms.
And that's certainly an area where interested in but they're also as you said tucking opportunities like the deals that we've done over the past three years.
Corebiome diversity in Nobody's Santos et cetera.
You're sure. These are all companies that kind of impact and the three to five year time period.
But there are bigger deals out there that we're looking at and I think that our ability to transact has never been better given what's the prospects are right now in the pipeline.
Super Thank you.
Okay.
And your next question comes to Frank <unk> [laughter]. It makes me canceling your 90 something.
Steve Scott Thanks for taking my questions wanted to start with the 400 million and orders you reference to give us a little bit more color on that if you can on spin.
Specifically, how much of that do you think is still up for grabs versus how much of that was maybe a function of delta variant spiking and individuals rushing out to shore up their inventory in relation to that so just maybe give us a little fuel into the durability of that 400 million.
Yes, certainly Frank Thanks, Thanks for the question it it's hard to say how much of that 400 million. We can we can convert because circumstances changed over time, but I think you're right and calling out the demand initially based on Delta variant.
But I think also in in the factors that that matter back to school and back to work programs are still underway today.
And there's been a endemic shortage of rapid and you can test normally from us but from other manufacturers as well. So we expect to convert some of that 400 million, we can't say exactly how much customer's we kept in touch with these customers throughout this process and I've tried to schedule when we can have.
Ask you to to meet their needs and so we expect some of them to come back probably not all of them to come back based on the circumstances, but the other thing which I think is is very important is the use of wrapping imaging test is a new phenomenon for everybody. This is not something that that people have been used to doing routine.
Lee Weekly daily whatever the case may be based on your exposure pattern to other people.
But they're starting to understand it which I think is driving initial awareness and demand and then as I mentioned previously department of Labor Osha requirements for testing and vaccination I think will be made clearer what the need is for anybody that's convening people together, whether their employers or.
Sports stadiums or concert venues nursing homes prisons et cetera, we'll have a tighter I think specification what's needed and the requirements for employers from there. So we're very optimistic that there's gonna be Ah reoccurring demand and that's why we pointed to the durability this opportunity for sure.
Perfect and then there's a follow up for Scott heard a lot of moving pieces and gross margins heard your comment about queue for like did it be similar to Q3 [noise].
Maybe give us a little sense to how gross margins you feel will look once we get through the different manufacturing and scale up inefficiencies that we're experiencing now some.
Some goalpost would be fantastic. If we can think about getting back to the 50% range or if it's 40 per cent range anything in that area would be great.
Yeah, Frank I think I think it's important first off just to point out you know we had a kind of a number of transitory factors this quarter right we decided the.
The issues associated with the and tell us that squad Scaleup, we're just not efficiently utilizing our overhead we're doing a lot of employee training as we get ready for manufactured manufacturing at higher levels.
So that was a major issue in the quarter.
We also had the reserve of $1.8 million, which had a pretty significant impact on the margins this quarter.
And then the other the other piece of the expiration of the Bill and Melinda Gates Foundation subsidy.
I think when you look to next year and you think about our margins structure.
I think when you think about the core business and you know the core business, obviously depends on on mix, but the core business are gross margin structure currently is and kind of be mid to high fifties.
And then obviously, we have the and tell us what.
On it.
Which.
We'll be at a lower gross margin and so hopefully that gives you a little bit of granularity in terms of kind of how to think about the overall margin structure and a chair.
Got it that's helpful. Thanks for taking my questions.
Interesting and I entered into the queue. Please press star and one now and your Touchtone phone.
And again, it's Darwin tend to the queue.
And our next question <unk> Maverick Court.
Hey, guys. Thanks for.
Picking my question.
Steve.
One I just wanted to make sure I understand uhm the queue for based business that can redecorate.
And my my T. Q based revenues were 40 million I my with a total of 54.
Pin collection that English Bob the bug.
14 ish.
The guidance for Q4 is it and playing a sequential stepped down from the top 40 million for the base business look historically you're.
Q for revenues have been higher than T Q and from everything that we've been having utilization is getting back to normalcy posted disruption in the corner just talk about the base business sequential should be above or below that 40 million that'd be fine. Thank you.
Yeah B J. Thanks for the question I'll I'll I'll state the topline that's Scott can give you details. This is similar to a previous question, though uhm, what's driving that sequential stepped down and four corner of the base business is timing or for our genomics sector within molecular solutions and so it's it's July.
A collection kits, primarily driven by consumer based companies, who change their buying behavior. You may recall, historically that the fourth quarter when they normally made their big buys in this case they made their big by some third quarter. So it was a timing issue primarily related around that particular issue.
Understood and and just done on.
Couple of clarification that questions.
Did you say core gross margins for mid to high fifties.
And if I didn't hear that that correctly <unk> pandemic you guys were running at the 60 60 plus.
You know what's caused this ghost marches to step down for the make the upper fifties.
Yeah. When you say, there's been a couple of drivers there yeah. The first one is really kind of related to product mix right. As we look at some of the mix issues now when we talk about <unk>. Obviously also excluding the Covid collection kits, which are one of our highest gross margin businesses.
This is the second piece, which is kind of driven some changes is the expiration of the bill and Melinda Gates Foundation subsidy and so when we look at our international business, the gross margins for that business or quite a bit lower than the overall gross margins and then the third component is really high too similar things that other companies are seeing in terms of shipping costs and.
And labor costs have obviously been on the rise and so it's really those three factors that are really driven the changes that we've seen there.
Or at least understood.
Just that one the last one for you on.
The code manufacturing site.
The 4 million monthly run rate in in January is that now.
Have all issue has been resolved in or are they are they are still outstanding issues are there any <unk> hitting that 4 million.
In Jan and if we do hit $4 million a month on the on the on the production side, what's the right way to think about uhm.
Code assumptions for a physical 22, oh for any of <unk>.
[noise], yeah, so because we haven't getting diners for.
Hello, Swab revenue for 2022 at least not yet and the way you think about the 4 million is that's our current projection based on our current course and speed and manufacturing. Okay. So unlike anything else there is risk in that but that takes them account. The time frame that we believe we need to do to.
Solve the issue that we haven't hand related to raw material variability in certain processing step variability so.
That 4 million just here no ties to the but we've stated before which is 70 million units and then tell us want per year, which also takes into account that in our base business. There is somewhere around 15 to 20 million units for Oraquick platform embedded in that so those numbers through tied together based.
On our machine capacity and also are timeframe for fully resolving the manufacturing issues.
What are these issues to you the manufacturing issues is that.
Maybe in simplistic terms.
Blocking and tackling or or do something.
Perhaps more.
Of a process, where they're keen that could have some rest.
Well, they're not process really changes that's the same process and.
Bill of goods and processing steps that we've had from the EUA process on.
The challenge has been to I'm moving for more of a manual process to an automated process and so that's where when and where the issues became apparent as we shared in August and so we've been working diligently so I won't be clear, they're not any new problems. So they have developed since we reported in August and in fact, we narrowed our sites on the critic.
A few involving raw materials, and <unk> and certain processing steps.
Okay.
Thanks for your day.
Thanks for you to eat at our next question comes Fantastic Ganley from City. Your line is hoping.
Hi, guys. This is like a fire on Kirkpatrick I was wondering if you'd like to touch on and that's what you're seeing in you know hiring hiring retention in wages.
I know, who I'm talking to a couple of other companies. There. There's there's some issues there given and everything and I was wondering if you guys can expand upon that thank you.
Sure certainly Elizabeth it's no doubt I tight labor market and we've experienced that primarily Emily high Valley, where we're hiring to ramp up for and tell us Rob.
Particularly in the manufacturing area, having said that I think we are getting traction of late in filling key roles.
But this is an endemic issue today I think there's a I think it was a macro view that came out a week or so ago that said that labor costs have gone up during the past quarter more so than they have been in previous quarters for some time. So we're not immune to that phenomenon, but I think we are successful in hiring folks.
I think the the most successful we've been is when we hire folks that are referred by other employees and so I think there's a stickiness to that sort of retention when somebody knows if somebody else is that the company and and that continues to I think give us good employees that stay with us in the long term.
Thank you and just as a follow up are you guys doing any impact from the nursing shortage an appointment there. Thank you.
I don't think we can identify anything from the nursing shortage perspective, no not not particularly.
Okay. Thank you.
You're welcome to next.
Can come to me Andrew Cooper from Raymond James.
Hi, Thanks for letting me hop back in May.
Maybe just to talk about something that's that's not good for a minute here.
You talked about having submitted to the F D. A for they got Mike the commercial gut microbiome product.
Can you give us a little bit of flavor for the use cases, you see there and where do you think we are in the process of having some of those things that have historically been a little bit more on the research side and and not really kind of true commercial where are we in terms of those things hitting more of a commercial use case in a commercial market.
Yeah, Andrew if that thanks. This is a lot like you know <unk>.
Skating to where the puck is going to be right and and so what we have in store for this FAA cleared device for the microbiome.
Is for its use in in clinical trials you know so when you need when you need a F D. A clearer device for that process.
And there are several of our customers, which we reported back in August who are in therapeutics development programs phase one phase two clinical trials et cetera.
In addition, there is an inherent reliability when you have enough to get a clearer device, even though you may not needed immediately. So this is very similar to where we were with our slide collection device early days now and 2015 2016, where we took the steps to get that device cleared and.
Then the F D. A as everyone knows required of consumer genomics companies to have their protocols F. D. A cleared so we were in the right place and the right time based on our investments in moving throughout the clearance for our site saliva collection device and we're doing the same for the microbiome. So I think we we are arriving at the <unk>.
<unk> have an inflection for.
Commercial use for.
For our for our product in clinical trials and beyond so I think that we see some letter just based on our own experience and that's what we're planning for.
Okay, Great I'll stop there thanks again.
Hi, Sandra.
The next question constant Jacob Catherine Stevens Your line is open.
Hey, good evening, everybody see something you called out in your comments and in your deck is that the increased investment in.
Your internal R&D pipeline can you Wanna talk about kind of like the initiative is there and then maybe for Scott. If you could just kind of help frame up how we should think about the the pick up in R&D expenses, maybe as we head into <unk> and beyond that to the extent you want to.
Yeah, certainly Jacob so I'll I'll start with some of the some of the products that I mentioned and in the in the call here.
We're working towards a H I V itself test to be cleared in Europe next year, we're working towards.
A prep adherence product, we're we're working towards the.
510 clearer device for the microbiome, which I just mentioned as well as the met a transcript on product and service offering for the microbiome as well and you know not to be ignored and all of this is cost reduction for and tell us what product, which is good which we're moving through online as well so.
There are a number of key activities here.
But we've outlined in highlighted which I think will be give us engines for growth for these innovations and.
And that's why we're making the investments today.
Yeah, and Jacob I would just add to that and you obviously it hasn't been lost on us with the significant uptick in revenue we're gonna see what <unk> next year, you know one of the things like what to do is to enhance and build out our internal R&D function.
And so that will be part of.
A process that we'll be.
Starting to realize we go into next year.
Right now you're also seeing some increase.
Research and development spending associated specifically with a tell us lab and so the studies that were running for the you a label expansion for instance.
Yeah. Those are all really hit in the second half of the year year here and so those are also part of the costs are study proceed mark lobby sleepy on there.
And so there's several things going on on the Intel swap Hunt.
Got it I'll leave it there thanks for taking the questions.
Pick up.
We have no further questions I'll turn the call back corner, Yeah can you can finally Max.
Oh, Thank you well.
[noise] attempting okay, one more [laughter], yeah, let me just take a Stephen K, Oh, Nope Chapped never mind.
I'll turn it back over to Stephen sorry.
No worries. Thank you everyone for participating in our call today and your continued interest in north shore, we wish you a.
Great afternoon, and evening wherever you are stay safe and be well. Thank you.
Thank you ladies and gentlemen. This concludes today's question and answer session and conference call. Thank you for participating you may now disconnect.
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