Q1 2022 OraSure Technologies Inc Earnings Call
Yes.
Good afternoon, ladies and gentlemen, and welcome to the <unk> Technologies' first quarter earnings Conference call.
At this time, all participants will be in a listen only mode.
Later, we will conduct a question and answer session.
I'd now like to introduce your host Scott Gleason.
Mr Gleason.
Now begin.
Thanks, Paul Good afternoon, and welcome to Orasure Technologies' first quarter 'twenty two earnings call I'm, Scott Gleason, the interim CFO and SVP of Investor Relations and communications presenting with me today for sure as Dr. Nancy Gagliano, our interim President and Chief Executive Officer.
Lisa <unk>, our president of diagnostics.
Kathy Weber, our president Mike our solutions.
As a reminder, today's webcast is being recorded in the reporting along with the slide presentation accompanying the webcast can be found on our Investor Relations website.
Before we begin you should know.
This call may contain.
Certain forward looking statements, including statements with respect to revenues.
The 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 our results are discussed more fully in the comp.
<unk> SEC filings, including its registration statements. Its annual report on Form 10-K for the year ended December 31 2021.
Quarterly reports on Form 10-Q, and its other SEC filings.
Although forward looking statements help to provide complete information about future prospects listeners should keep in mind that forward looking statements are based solely on the information available to management as of today.
<unk> 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 softer gigawatt.
Good evening, Thank you Scott and thank you everyone for joining our call today.
We're sure once again delivered record revenue this quarter.
Perhaps more importantly, we made substantial progress on our Intel is swapped manufacturing scale up and continue to improve the efficiency of our process.
This positions us well for increased and tell us what revenue throughout the remainder of the year from a demand perspective, we continue to anticipate robust government demand through the end of the calendar year.
And we are working to expand our commercial footprint for the test as well.
I also believe it is important to highlight that this quarter, excluding COVID-19 products, both our diagnostics and our molecular solutions businesses grew at a double digit rate year over year with diagnostics up 11% year over year.
<unk> and molecular solutions growing 28% year over year. This demonstrates the continued strength of our core business.
As most of you know I was recently appointed as interim CEO by the board of directors to focus on scaling and improving the production process of Intel a swap and to ensure business continuity as the board conducts its strategic alternative process in tandem with the search for a permanent.
<unk>, our permanent CEO search is well underway and we have identified a number of high quality potential candidates for the role.
Regardless of which path the company ends up taking we remain highly optimistic about our ability to create value and be a market leader in the areas of simple reliable point of care and home test as well as innovative and.
Z to use sample collection techniques.
Additionally, as an organization, we remain focused on improved execution and driving profitable growth with a number of programs in place to improve our long term cost structure and margin profile with that I'm pleased to turn the call over to Lisa.
To provide an update on our diagnostics business unit.
Thanks, Nancy I would first like to provide a quick overview of our core diagnostics business.
Hollowed by an update on our progress with Intel swap.
For the first quarter. The overall diagnostics business unit revenue was $38.3 million and grew 163% versus last year.
While most of this growth was driven by the addition of and tell US was our global diagnostics business, excluding and tell us what grew 11% versus the prior year.
This represents strong growth, especially in light of the Q1 headwinds from our HIV OTC sales to the CDC, let's stop HIV together program and the lapping of the Bill and Melinda Gates subsidy, which wasn't effect for most much of our international HIV business in Q1 of last year.
Our core domestic diagnostic business, excluding Intel at swap grew 7% in the quarter due primarily to increased employee drug testing as more people returned to work and gains in our grant revenues from the U S government versus Q1 of last year.
Our domestic HIV revenue declined year over year due solely to the lapping of last year's Q1, CDC, Let's stop HIV together program, where our or quick in home HIV test kits were shipped directly to consumers.
In that regard we are pleased to announce that the CDC recently issued a $33 million grant opportunity notification specifically for the mass mailing of HIV self test to persons disproportionately affected by HIV in the U S.
This has an estimated award and start date of September 30th 2022.
Given the oar shore is the only FDA approved OTC HIV self test in the United States, We would expect to benefit from this award.
Other partners bidding on its execution.
We believe this represents a continuation of the successful pilot program from Q1 last year and could lead to several quarters of strong HIV sales in late 2022 in early 2023.
We also believe along with the recent COVID-19 testing initiatives. This program demonstrates a new potential model for the U S government to take a more direct testing role in public health for major diseases by targeting the highest need communities.
Outreach testing such as this is an area where offshore it's easy to use test have a substantial benefit versus other tests.
And we believe outreach or direct to consumer testing program.
Also provides strong health economics, given the low cost of testing and sizable cost savings of disease prevention.
We see this as an area of future opportunity for the diagnostics business for our existing products as well as other disease and wellness testing opportunities, which could utilize the same model.
Outside the U S. The international diagnostic business grew 20% versus the prior year quarter and grew even faster on a volume basis, given the exploration of the bill and Melinda gates subsidy in June of 2021.
Excluding the impact of this subsidy international diagnostics grew 34% versus prior year.
Our strong international growth in the first quarter is partially reflective of our strategy to expand the reach of our products into new international markets.
As a reminder, in the second half of 2021 we received our Thailand, Presale certification, which will allow us to register the product in Asian, and Latin American countries regions, we were unable to access without certification from the country of origin.
In addition, early in the first quarter of this year, we launched our HIV self test into six European countries, including the UK, Germany, France, Spain, and Portugal, where the test will be available in retail pharmacies.
All these initiatives take time to garner traction we believe they will help contribute to our international growth and importantly increased access for HIV self testing around the world with our proprietary oral fluid HIV self test.
Now I would like to discuss and telephone hub and our operational progress in the quarter, which was significant.
As a reminder, diagnostics operations was integrated into the business unit under my leadership at the start of this year.
As previously announced we hired in operations consulting firm used by the National Institute of Health Radical program with deep expertise and manufacturing scale up of rapid antigen tests.
This team made significant progress during the quarter identifying major bottlenecks and areas for efficiency improvements.
In Q1, we have resolved all prior scale up issues for Intel a swab.
Increased production greater than four fold between early January and April and reduce scrap from approximately 30% to less than 1% in the quarter.
These significant improvements were due to a methodical lean six sigma approach, which entailed several key steps.
First we uncovered that the manual handling of our assay stripped compete inside the test stick with causing our scale up challenges, we have since changed procedures and automated our assay card production completely.
Second we mapped and measured the process to determine the rate limiting steps and change settings on a robotic assembly to improve the part per minute output.
We then turn to the next limiting step, where we optimize settings and vision systems or automated striping and assay card Assembly machines.
These changes improved output, while also reducing in processed scrap.
We continue to find more opportunities for improvement as we further optimize the manufacturing process.
In early April we have demonstrated production rates at our installed capacity.
While we are now able to produce at this capacity. We are currently in batching, our production to meet the demand from both our current government procurement contract and the commercial market.
There was significant work that went into these changes and I'm exceptionally proud of our team and the NIH radical team and driving these meaningful improvements.
Beyond capacity, we also focused on efficiency and many of the changes listed above reduced our scrap rates and material waste as well.
To give you a sense for how significant these changes were in the quarter. Our finished goods scrap rates declined from approximately 30% in early January to less than 1% by late March.
While we have made significant progress we continue to believe that there is room for continued improvements in our processes.
We have created a detailed cost of goods sold improvement plan, which outlines key areas for profitability improvement, including our packaging redesign efficiencies through global logistics and shipping efficiencies associated with further process automation and efficiencies garnered through site optimization and workflow design.
In aggregate, we believe we can dramatically reduce our operations cost structure in the coming years.
And our longer term vision is to have a highly automated continuous manufacturing process utilizing the advantages of our department of defense capital equipment contract that will benefit all of our lateral flow products, we view improving our cost structure is strategically important given gross margin improvement can unlock further.
Our investment in R&D, and sales and marketing to drive innovative new products and opportunities in new market segments.
This quarter, we continued to provide and tell a swap to the department of health and human services as part of our formerly announced procurement contract.
The US government has told us they plan to continue to buy and tell us what ongoing through the year as they support silver programs, which have the need for ongoing consistent testing. This.
This helps even out demand and enables continued shipments even in lower periods between surgeons.
We are also working to continue to grow our commercial footprint for Intel swab.
Following the omicron surge. This winter, we have seen a reduction in commercial testing and high inventory levels at both customers and distributors.
Consequently, we believe the commercial business will remain somewhat tepid until we see another surge in corona virus infection or until inventory levels come down.
Yeah.
We also continued to garner data to support Intel swap accuracy in the face of new variants as required with our emergency use authorization or short initiated studies using live Sars Covid two omicron virus at the National Institute of Health Rocky Mountain lab to evaluate our test's ability to detect this variant and all.
Other variants of concern.
Importantly, the data indicates that and tell us what detects the omicron variant at similar levels of detection as it did with all other variance of concern and the original will constraint.
The NIH studies are not published in virus with the limit of detection of Intel a swap against all vary.
In conclusion, we made substantial progress this quarter in our manufacturing scale up have begun to optimize our process to improve efficiency and are highly focused on a multi year journey to improve our cost structure and profitability. We are excited by the opportunities in front of us and strongly believe that the role for easy to use.
Tests in point of care and home settings is growing as our health care system evolves to continue to empower patients.
With that I am pleased to turn the call over to Cathy to discuss our molecular solutions business here.
Thank you Lisa.
Nancy mentioned, our core molecular solutions business started the year on a strong note with sales plus 28% versus Q1 'twenty one <unk>.
Importantly, we saw growth in existing customers as well as the addition of new customers.
Our strong genomics kit growth was driven by our commercial segment, which grew 50%. This growth was driven by a combination of customers resuming their genetic risk testing and population health initiatives.
Customers supplementing saliva as a sample type for some blood based test due to the blood tube shortage.
And some changes to order patterns by our key accounts.
As we look to the second quarter, we are anticipating some shifts in order timing from our historical quarterly splits with a few of our major customers for our molecular kids business.
Additionally, we will be undergoing the IV Dr transition for our saliva based kits in late may which could introduce additional volatility to second quarter shipment timing.
Therefore, we are anticipating that our core molecular kids business could be flattish on a sequential basis. This quarter. Despite typical positive seasonality in the second quarter.
For Covid collection, we were pleased to achieve 12% growth versus our Q4 levels, but did see a decline versus our peak COVID-19 sales in Q1 'twenty one.
Our sales in Q1 reflected the gain of the need state testing customer.
As well as kids sales for several clinical and research studies in the U S and Canada offset by a shift to antigen tests and high kit inventories in some of our existing customers.
Looking ahead, we're focused on expanding beyond the U S and a broader overall lunch and viral surveillance.
However, we expect to see continued volatility in Covid collection kit demand over the next several quarters.
As Nancy mentioned, we continue to advance the launch of our new collection and service offerings. This quarter, we completed production transfer of our new Omni gene got Dx five 10-K product and will begin shipping this quarter.
We began promoting our met a transcript on service at several microbiome conferences. This spring.
As part of our commercialization strategy around our new got met a transcriptome next offering.
We'll be embarking on a series of marketing activities.
These activities will include Illumina invited speaker engagement.
Webinars with Illumina guest and cope coupled co publication with Illumina researchers are relevant development and validation work.
This quarter, we will also add a few new offerings to our portfolio.
These include the omni gene got RNA DNA kit.
This research use only product based on the omni gene got DNA kit incorporates a newly developed and validated reagent to stabilize microbial DNA and RNA from Hugo human fecal samples.
As microbiome applications and use cases continue to grow there is a growing need to study the transcriptome as well as the microbiome.
We're also launching Medici and canine species specific curated database to improve the interpretation of the composition and function of the microbiome.
Managing canine increases the annotation rate facilitating the identification of relevant microbes and uncovering pathways important and health nutrition and disease.
This quarter. We also were awarded three new patents pertaining to methods for microbiome testing as well as our microbiome device and chemistry outside the U S.
Additionally, we filed a method patent pertaining to microbiome analytics.
We continue to look for opportunities to expand our intellectual property portfolio for our products and services.
Finally, although we enjoy attractive margins across our collection kit products, we have embarked on our Cogs management program targeting a minimum of 10% Cogs reduction across our collection kits, despite increasing raw material costs.
We look forward to sharing the results of this initiative in future calls.
With that I'm pleased to turn the call back over to Scott.
Thanks, Kathy I'm pleased to discuss our financial results for the first part quarter and provide updates on our financial outlook.
First from a topline perspective, we delivered total revenue of $67 7 million in the first quarter, which was another new record for the company representing year over year growth of 16%.
Well ill tell us what was clearly a major growth driver on a year over year basis. We would also highlight that our non COVID-19 products actually grew 21% year over year with.
Double digit core growth in both our diagnostics and molecular solutions business.
Turning to our gross margins our gross margin percentage in the first quarter was 36%.
Gross margins were significantly impacted by a few items in the quarter and this is not reflective of where we expect our longer term margin structure for the business to be.
Thanks, very high scrap rates for the first few months of the quarter due to inefficiencies in the Intel swap production process, along with under absorption as we trained new hires.
Two items combined combined led to approximately $7 million and expense in the quarter, having a gross margin impact.
As we noted in our earnings release, our Intel swap finished good scrap rate declined from 30% at the start of the quarter to less than 1% late in the first quarter.
We also improved our in process waste significantly.
And our profit Sylvia.
Improved yields at a lower cost this remarkable turnaround was driven by a number of initiatives implemented through our new leadership structure and our consulting team that had previously supported the NIH Red X program.
And we will support improve gross margins going forward.
We also saw an impact this quarter from product mix as last COVID-19, flatter collection kits were sold in more than call swab is sold at lower gross margins.
Furthermore, as anticipated we saw declines in average selling price this quarter since the majority of our volume in the quarter was the government procurement contract.
As a leadership team. We are currently evaluating a number of structural changes to our manufacturing process that we believe can dramatically improve our cost structure.
Include changes in our shipping and logistics further automation initiatives to reduce labor requirements supply chain optimization.
Raw material sourcing.
And changes to our packaging configuration.
Some of these changes can be implemented this year and we will take a few years to fully implement but we see strategic value and improving our overall cost structure, which will allow for further invest in the business and improve profitability.
From an expense standpoint, total operating expenses in the quarter were $40 million and increased $3 7 million on a sequential basis to.
We continue to place a high emphasis on expense control is important to note that we had $4 9 million and nonrecurring expenses associated with our CEO transition our strategic alternative process and other onetime items this quarter.
Due to the non recurrence of these items onetime items.
<unk> operating expenses to decline modestly in the second quarter.
From a cash perspective, we ended the quarter with $112 million in cash and cash equivalents.
As of March 31, we had approximately $17 million due from the government associated with our $109 billion of department of defense contract to build additional manufacturing capacity. So our pro forma cash position was 129 million.
As anticipated we saw a significant use of cash this quarter from working capital adjustments with receivables and inventory is increasing as we scale up and tell us Bob.
Changes in working capital.
To use of cash of approximately $36 million a quarter and we expect these working capital changes to moderate as we go through the remainder of the year.
We are not providing formal financial guidance this quarter, given our ongoing strategic alternative process.
This quarter. However, we are anticipating continued growth and that's all swab and the second quarter, but this will be offset to some extent by expected meaningful reduction of our COVID-19 collection kits business given the decline in laboratory testing in United States. Additionally.
Additionally, as Kathy indicated in her section we are expecting some timing shifts with our molecular chips business.
Given these puts and takes we are expecting modest revenue growth in the second quarter.
Stability perspective, we are also anticipating improvements in our gross margins a reduction in total operating loss in the second quarter, coupled with many meaningfully lower cash utilization.
With that I'm pleased to turn the call back over to Nancy concluding remarks.
Thank you Scott as well as Lisa and Kathy as.
As you can see we've made significant progress this quarter on scaling our Intel a swap production and improving our operational efficiency.
We also saw strong growth in our core businesses and launched two new important products in our molecular solutions Division.
Our leadership team and our board of directors are highly focused on strong execution growing the business.
Improving profitability and driving shareholder value with that I'd like to turn the call back over to Scott to start our Q&A portion.
Thanks, Nancy operator, we're now ready to begin the Q&A portion of our call. We would ask that you limit your questions to one question and one follow up to ensure broad participation.
Okay.
Okay.
If you would like to ask a question. Please press star one on your telephone keypad now and you'll be placed into the queue in order received.
These be prepared to ask a question when prompted.
Once again, if you have a question. Please press star one on your phone now.
And we have a question from Casey Woodring.
Hi, Thanks for taking my question.
Hi, Thanks for taking my questions.
So you noted that the government plans to continue buying and tell us lob throughout the year I think the contract that you had was for $205 million worth of tests.
Are these numbers still how we should think about the government and tell us what revenue for this year and now that you've increased production capacity and then I guess, how much of that 22 million and tell us what revenue this quarter went to the government.
Thank you Casey, we're very pleased to have such a strong relationship with the government I'm going to turn this over to Lisa to give you some more specifics.
Yeah. Thanks, Casey, Yes, we do have the government procurement contract that we had previously announced though with the target value of 205 million, we're not providing forward looking guidance on on how much of that contract will be utilized this year and the split of government or non government.
I will say, we have ongoing conversations with the government every single week.
And we have been receiving large consistent orders weekly.
We're not at our current installed capacity as you heard from the prepared remarks, we are currently at that level and demonstrating that installed capacity at this time.
So what we're doing is simply matching our production to.
Both the government as well as nongovernment demand on an ongoing basis. You know importantly, I think we can we can produce at our installed capacity and we could increase production depending on the need of demand and you know given the latest uptick in COVID-19 in this country. We made me to two to increase production.
Corresponding to that uptick.
Yeah, Okay. So the only thing.
We did say on the call that.
The majority of the business this quarter was from the government.
It's a little bit different from our fourth quarter, whereas actually the majority of our business was commercial in the fourth quarter.
Gotcha.
Then as we think about I think you mentioned that production increased four fold through the quarter can you give us some color as to where that kind of run rate was in January versus where you are now.
Okay.
Yeah, Okay case.
We're not giving out kind of the specifics around kind of volumes.
Obviously at the beginning of January we were facing some some scale up challenges, we've scaled up throughout the quarter.
We talked about the fact that in early April .
Able to demonstrate production at our installed capacity, which I think we've given that number before so you guys have an idea of what that is.
So obviously, we've lapped dramatically over that timeframe, but we're not we're not getting.
Weekly numbers.
Okay, and then if I could just fit one more in what's a dig into the strategic review that was about <unk>.
January can you give us an update on <unk>.
That's progressed when the board expects to complete the review and as a follow up with management transitions called before the strategic review ads or with the boardwalk.
Our roadmap in place before you know when the review is complete I should say before imagined.
And so thank you.
Thank you Casey so.
We're obviously not going to give you details of the exact process. We do expect that the process will be complete by the end of June .
The process is active and ongoing as is our CEO search, which we are doing in tandem. However, with this going on as you can see we are not stalling all the hard work it takes to run the business and we're staying very focused on our business.
Imperatives.
Mhm.
Thank you.
Question from Frank Tuck in them.
Your line is open.
Great. Thanks for taking my questions I wanted to just follow up on the $205 million contract. Once more can you just explain the terms a little bit clear here the $205 million target. So I guess the more directly.
Are they committed to $205 million or is that a target amount where they could elect to reduce that amount. If the end user demand isn't there just trying to get a little bit of understanding of the contract terms.
I'll turn that over to Lisa once you go ahead.
Yeah sure yeah. So the target amount of $205 million is actually phrase just that in the contract terms, you know and as with any government contract.
That's not a firm commitment.
But it is indeed, what does the anticipated amount would be over the period.
There could be a much higher amount for a much lower amount ordered again, depending on the various government programs that they have in place there still is a good bit of federal government.
Procurement and supply of rapid antigen test to a number of different you know settings, particularly those with with congregate settings, and individuals who need to be tested on a more regular basis. So we're currently seeing you know good demand from the government consistent on a weekly basis, which is <unk>.
We're hopeful when Covid goes through the searches and then the the peaks in the valley so to speak.
And I'll just add.
To Lisa, saying, Yeah, we meet with the government on a weekly basis and they share.
Their insights on what their needs are and they have provided only encouragement that the.
The needs will continue so we have no reason to suspect anything different.
Great. That's really helpful. And then I'll just stick to my my one follow up Scott I was hoping you could.
Just clarify when you talk to modest revenue growth I may have missed it was that on a year over year basis or a sequential basis.
Yeah, Frank Thanks for clarifying that we met on a sequential basis, so modest growth relative to where we were in the first quarter.
Perfect all right I'll stop there thanks for taking my questions.
Thank you.
Thank you.
If you do have a question please press star one.
On your telephone keypad now.
And we have a question from Andrew Cooper.
Your line is open.
Hi, everyone. Thanks for the question.
Maybe first sticking with Intel Swab I think there was a comment in the prepared remarks about inventory in the channel I was wondering if you could give us a sense for what the inventory looks like in distribution and sort of the commercial channel overall, maybe relative to.
Demand, if you could give kind of a days or weeks.
Inventory in the channel I think that'll be really helpful for us for our understanding of what the commercial side.
Yeah.
Thank you Andrew and once again, we have another question for Lisa.
Yeah. Thanks, Andrew.
We clearly are watching the the amount of inventory in the channel in both our distributors as well as retailers I think the challenge was that with the omicron surge. There was clearly not enough supply you know overall for rapid antigen tests.
And so as the disease was growing there weren't enough tests to keep up and then all of a sudden the supply of tests became available as the disease was was going down.
So that's essentially where the where the excess inventory in the channel have come from.
I don't know that I could give you a good number broadly across all the different channels in terms of days of inventory on hand.
But it will be fairly significant at the end.
Towards the end of the omicron surge so as the time goes by and as you start to see the number of cases in the United States are up significantly on COVID-19, that'll certainly eat up.
The inventory that's in the channel over the course of the second quarter.
Okay.
Okay, great and maybe one more.
You mentioned the $33 million I think it was great opportunity for HIV self testing just was wondering if you could give a little more detail. If there is sort of a timeframe for that $33 million number it will be something that in theory would be split somehow or you would in theory kind of be able to win the full amount given youre the only FDA approved.
Just was hoping for some color on that opportunity.
At least now Nancy I guess I'll go ahead, Yeah, Oh sure Yeah. It's a great question first of all the opportunity is listed out there on the C.
CDC website around this this $33 million, there's not a lot of information there but.
But from our understanding is it will be awarded to a either a health care facility or another group.
Group that would be executing the direct to consumer mailing of these kits just like they did in the Q1 time period of last year.
So the total award is $33 million. The only thing we know on timing is that it's supposed to start in the awarded and start in September of this year most likely it will go into 2023, it kind of depends on how many you know how many kits they buy with that money and how long it takes to distribute all of that and the 33.
Million dollars includes both test distribution directly to the consumer there's follow up counseling. That's involved in some other services that are provided by both our health care establishment and logistics provider. We think it's going to be similar to what happened in Q1 of last year and there was a number of different groups that were involved so we don't really.
No, which what portion of that $33 million will be coming to us in terms of procurement of our kits.
But certainly we will have a portion of that because we are the only approved self test in this country and the details online say specifically for HIV.
Okay.
Yeah, Yeah yeah.
Yeah.
Got it.
And Andrew just to clarify the $33 million of the total contracted work.
Some of that as Lisa said, we will go for two shipments fulfillment training and other things and so only a portion of the award is for the actual test kits itself.
Okay, I will Oh stop it seems like you guys. Thanks.
Okay.
Thank you.
And we have no further questions in queue at this time.
Yeah.
Alright, well thank you for.
Participating on today's call and for your continued interest in Russia have a great afternoon, and evening and stay safe and be well.
Sure.
Thank you everybody. We appreciate your time.
Yes.
Yeah.
Yeah.
This now concludes the meeting thank you for joining and have a pleasant day.
The host has ended this call goodbye.