Q3 2022 OraSure Technologies Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Okay.
Good day and thank you for standing by welcome to the Orasure Technologies third quarter earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the session you will need to.
Press Star one one on your telephone you will then hear an automated method advising your hand is raised.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your Speaker today, Scott Gleason head of Investor Relations go ahead Scott.
Thanks, Shannon and good afternoon, and welcome to warfare technologies third quarter 2022 earnings call.
Scott Gleason SVP of Investor Relations and communications, because that even with me today for sure as Carrie Eglinton manner, our President and Chief Executive Officer, and Ken Mcgrath, Our Chief Finance Officer.
As a reminder, today's webcast is being recorded and the recording can be found on our Investor Relations website.
Before we begin today you should note. This call may contain certain forward looking statements, including statements 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 approval expectation.
And strategies actual results could be significantly different factors that could affect results are discussed more fully in the company's actually SEC filings, including its registration statement. Its annual report on Form 10-K for the year ended December 31, 2021, its quarterly reports on Form 10-Q, and its other efficacy filings.
Forward looking statements help to provide complete information about future prospects. What's your you 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.
Also today, we may discuss financial measures in accordance with GAAP and on a non-GAAP basis, we believe that non-GAAP information is useful because it can enhance the understanding of our ongoing financial performance, we use non-GAAP reporting internally to evaluate and manage our operations and we choose to provide this information because it allows for greater transparency with respect to key metrics used by managed.
And its financial and operational decision, making.
Well, if there are institutional investors.
For the analysis to help analyze the health workers business or.
A reconciliation of GAAP to non-GAAP operating expenses can be found in the press release.
Good afternoon.
Just first on the Investor relations sections of our website with that I'd like to turn the call over to Kerry. Thanks, Scott and thank you to everyone for joining US today, we were really pleased to once again deliver strong results for the quarter and Ken and I and our whole team are highly focused on ensuring we achieve our financial targets while providing.
Increased transparency to investors to that end this quarter, we return to both profitability and positive cash flow from operations ahead of our established guidance. This has been and remains our leadership team his primary focus.
As we work to strengthen our foundation of the organization, we still have more work to do.
To ensure our long term financial success and we are actively working on fiscal year 2023 with planned spending reductions which include aligning our cost structure to various scenarios what can tell us what by doing this we aim to ensure the company has a stable foundation from which to deploy the cash we expect to generate from.
COVID-19 sales in coming quarters to fund future growth investments, we will provide more details on this endeavor in our coming quarters as we finalize our planning for next fiscal year and beyond.
And we're continuing our transformation journey now and had a number of key learnings in the quarter as we look to strengthen our foundation, we're putting in place scenario plans to account for varying levels of and tell us what revenue in coming quarters, while also working to leverage our new enterprise capabilities that we built ramping let's test it.
Zempel of our organizational improvements.
Utilizing our Super factory capabilities to increase production efficiency for our Oracle platform and its assay card that is for HIV and HCV as well on our new automated equipment. We're also beginning to evaluate new complementary product offerings expanded commercial channels and of course.
Strategic partnerships too.
Finally, as we develop greater visibility on our financial progress, we will begin to look at inorganic growth opportunities as well as our capital structure.
I've shared before the mantra underpinning our day to day operations of our strategic transformation.
And operate with disciplined execution, and accountability and now I'm going to transition and provide some additional granularity on our business units beginning with our diagnostics segment.
This quarter there were three significant emerging themes within our diagnostics portfolio. The first was our expanded retail success with our Impella swab, COVID-19 tests, which could support a longer commercial tail for this product.
We saw the government take an increasingly active role in global public health challenges with it together take me home HIV testing programs sponsored by the CDC administered by Emory University as well as our new BARDA contract for version two of our Ebola testing and final.
We made progress on our journey as we look to improve our overall margin structure of the organization as.
As we focus on is how it probably as strong volume in Q3 and as we discussed last quarter. We have received delivery orders from the U S Federal government, which allow us to order up to approximately 90 million pets as of the end of the third quarter. We had 30 million of these order and outside the federal government.
We also had a number of other meaningful and tell us what win this quarter. We won a retail contract with a midsized grocery store chain with the opportunity to be an up to 400 stores nationally.
We signed an employee has been contract with a top fortune 500 company and we are currently available on Walmart Dot com as well and Additionally, we signed the contract with Amazon Dot Com under which the retailer will carry out of fulfill and tell us what orders from consumer and given the improvements in our capacity we are.
Actively engaging potential customers in public health and government institutions, and the retail settings, and we hope to have more positive developments as we continue to serve health needs through the upcoming respiratory virus event. Our second major theme that has emerged this quarter in order for a strong relationship with.
U S government agencies and a more active role we see our government taking in public health given the ease and simplicity of our test designs. We believe we are an ideal partner for outreach testing and critical diseases and the global pandemic has shown how the government can play a more active part in addressing public health crisis.
This trend as well as demonstrated by our announcements this quarter that we will be supplying our aura quick HIV in home test.
As part of the CDC together take me home program, which will mail, our HIV OTC kits to consumers requesting them many of whom are in high risk or other vulnerable communities not well supported by the current health care system.
The total program administered by Emory University is valued at 41 $5 million over five years and while only a portion of that amount is for test procurement. This program has the potential to help grow our domestic HIV business and conserve as a case study for similar future programs in the U S and <unk>.
Other jurisdictions beyond.
We were also awarded $8 $6 million from BARDA to develop a second generation Ebola test with improved sensitivity am longer shelf life that will also be developed utilizing our automated Super factory manufacturing process currently Uganda, and the Democratic Republic of car.
<unk> are experiencing significant Ebola outbreaks and we have seen increased interest in procuring Ebola task from several organizations.
We continue to focus on production efficiency as we scale, our Super factory and plan for future volume scenarios around Impella swaps, we have submitted our new packaging configurations in the U S food and drug administration for approval.
Under this new configuration is designed to reduce costs through lower material usage and due to its smaller size overall lower freight expense.
If authorized it will enable more efficient use of warehouse space internally and for our customers. We have also begun process development to transition our legacy HIV HCV and Ebola products over to our new Super factory automation, which will lead to labor savings and efficiencies as we consolidate around the single.
Manufacturing process.
The point, we are reviewing our facility footprint and looking for areas, where standardization across product lines can reduce our cost structure. Finally, we are performing a top down review of our supplier agreements to also look for areas of material savings, including the possibility of bringing some of the more expensive raw material production in house.
These efficiency programs will help on our journey to improving profitability and providing the cash flow for investments in the future next.
Next up I'd like to discuss our commercial progress with our molecular solutions business unit.
Beginning with our core collection pets are core kids business was down 24% this quarter on a year over year basis.
We saw continued pressure from some of our more consumer focused customer we see this recent softness in the business as more transitory in nature of some of our more consumer oriented customers have delayed orders are brought down the inventory levels given financial uncertainty we remain optimistic however over the long term.
The growth prospects for this segment.
We're working very hard to add new significant customers in diagnostics and clinical lab services, which we know well to quickly accelerate our return to growth. So that's and we recently received an important new clearance.
Or collect the act from the U S FDA for general prescription and over the counter use or if you're received this designation through its partnership with crippled to support Alpha one deficiency testing in patients who are symptomatic for chronic obstructive pulmonary disorder or may be at risk for alpha one deficiency.
Of course Alpha one deficiency razor patients' risks for long disorder, and it's estimated that about 3% of the $15 million.
L. P D patients in the United States have alpha one deficiency crippled our partner offer free Alpha IV screening tests supporting Alpha one deficiency screening that utilized our or collect dx device.
The partnership with Gripple represents valuable opportunity for US in addition, and very important. This clearance also means that our origins <unk> and Oracle Lux Dx product may be used now at home.
Adult without direction from a health care professional when approved in conjunction with our partner.
Our therapeutic partner therapeutic or device and without us having to obtain a separate new FDA approval, we see more and more opportunities for cleared collection kit to be used in conjunction with drugs and devices as health care increasingly shifts towards precision medicine, where the need and the opportunity.
There is two identified target patient population for targeted therapeutics. We also saw some positive developments in the microbiome testing space this quarter with our diverse agenda subsidiary.
Revenue for the segment recovered as anticipated and was up 63% sequentially to $2 million. Secondly, we saw the first microbiome based therapeutics received the Fda's vaccines and related biological products Advisory Committee approval along.
With other drugs in the pipeline there is the potential for multiple new biological license applications to be approved by the FDA in the coming year, which could be a strong catalyst for research funding.
This quarter, we also announced the partnership with Mars Petcare to create the worlds largest biobank around microbiome data for cats and dogs samples collected as part of the Biobank study will be analyzed and diverse agenda will sequence. The DNA of the micro organisms in a sample mark.
Scientists will then use the data to generate insights about what cat and dog microbiome look like over time, including on health and disease like with our diagnostics portfolio. We are actively working on cost reductions and margin improvement projects. We are currently looking at.
Real opportunities to reduce material and logistics costs across our product lines and working on further integrating our diverse adjourn and of us honest subsidiaries to reduce expenses now.
Now I'd like to turn the call over to Karen to provide a more detailed financial analysis of the quarter.
Okay.
Thanks, Terry I'm pleased to discuss our financial results for the third quarter and provide updates on our financial outlook.
First from a top line perspective, we delivered total revenue of $116 5 million in the third quarter, which is another new record for the company representing year over year growth of 116% our diagnostics business unit delivered total revenue of $97 7 million in the quarter.
315% versus last year called.
While the majority of this growth was driven by Intel a swab, which increased over 10 fold year over year.
Our core diagnostics business was up 14% in the quarter largely due to non product revenue.
Our molecular solutions business unit delivered revenue in the quarter of $18 8 million and declined 38% relative to the third quarter of last year, Excluding COVID-19 revenue the business declined 24% and as Carey mentioned earlier in the call. This was really tied to some increased softness in ordering from a more consumer oriented counts.
And we are working hard to change this paradigm as we look into 2023.
With our COVID-19 collection kits, we saw continued declines as PCR test volumes declined at our commercial partners in favor of point of care testing solutions.
From a gross margin perspective.
non-GAAP gross margin in the quarter was 40%, which was flat on a sequential basis, the sizable mix shift in revenue towards our diagnostics business unit in the quarter created some margin headwinds with 84% of revenue in the quarter coming from diagnostics versus 75% last quarter.
We continue to make plans to boost our longer term gross margin profile, including looking at packaging and standardization across products moving our legacy test automation and site consolidation based on future volume contingencies.
We will provide more details on our plans and outlook in the future as they come to fruition.
Moving onto our operating expenses, our non-GAAP operating expenses increased by $1 7 million relative to our total non-GAAP operating expenses in the second quarter to a total of $35 3 million.
The increased operating expenses in the quarter were tied to increased reserves.
This quarter, we had a noncash impairment charge of $6 6 million.
Due to the impairment of our manufacturing equipment associated with our COVID-19, molecular kits based upon a reduced volume forecast for these products.
In the third quarter, we generated positive non-GAAP operating income of $11 4 million and non-GAAP net income of $9 7 million.
This translated to non-GAAP earnings per share of <unk> 13.
Importantly, we generated positive cash flow from operations in the quarter ending the quarter with total cash of $102 million.
See a significant opportunity to generate meaningful cash flow in coming quarters, as we continue to focus on operational efficiency and generate meaningful <unk> revenue.
Additionally, if <unk> revenues decline in the future our cash position would benefit from significant reductions in working capital associated with our scale up and it's all swap revenue.
As Carey mentioned early in the car and the call. However, we are committed to ensuring we have significant capital to invest in the business in future. So at this point, we are actively looking for further efficiencies across our organization as we complete the budget process for 2023.
Given the current challenging capital market environment. We believe this puts us in the best position to succeed in the future and will allow us to make targeted investments with attractive returns on invested capital utilizing the cash we generated from COVID-19 products.
We are providing fourth quarter financial guidance, calling for revenue of $95 million to $100 million and representing 49% to 57% growth over fourth quarter of last year.
The anticipated sequential decline in revenue is tied to a government procurement contract with the school testing program we.
We saw a number of large stocking orders by school districts that the school year as the school year began leading to outsized revenue in the third quarter.
As we moved further into the school year restocking orders have moderated and consequently, we expect <unk> revenue to be lower on a sequential basis.
Given our expectations are very high international diagnostics revenue, which is one of our lower margin business segments. It is possible we could see gross margins decline on a sequential basis in the fourth quarter and then return to the improvement trajectory in 2023, as we introduce additional operational efficiency programs.
We continue to anticipate positive cash flow from operations in the fourth quarter.
With that I am pleased to turn the call back over to Kerry for concluding remarks. Thanks, Ken.
Continue to make significant progress on our transformation journey this quarter as the company focuses on innovating and operating with disciplined execution and accountability. We advanced again this quarter on our path to sustainable financial success as we returned to generating positive cash flow ahead of schedule and.
Delivered on the increased scale up of our Intel Quad manufacturing capacity, we believe that our capabilities can help power, where healthcare is going and meeting people patients where they are providing innovation and care at the lowest possible level of acuity, we have the product expertise.
And talent, enabling the ongoing shift in healthcare therefore, our focus going forward will increasingly look for ways to optimize our existing business through new innovation and partnerships as we move beyond strengthening our financial foundation with that I'm pleased to turn the call back.
Over to Scot for Q&A. Thanks.
Thanks, Carey Shannon were now ready to begin the Q&A portion of the call. We ask that you limit your questions to one question and one follow up to ensure broad participation.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced please standby, while we compile the Q&A roster.
Okay.
Okay.
Our first question comes from Patrick Donnelly from Citi. Patrick Your line is open.
Hi, This is Lucy on for Patrick Donnelly first congrats on the quarter and thank you for taking my question.
On the Amazon partnership.
Can you just talk a little bit more about the margin impact there. When you when you expect to actually see that flow throughout the model just any further color there would be helpful. Thank you and I have one follow up.
Thanks, Larry and I appreciate the question and Youre chime in I'll, just start and then maybe pass to Ken, but I'd say, one we would call it a contract that makes and telephone available.
Like like the retail opportunity a terrific retail opportunity, but that's in general we have shared that that's actually a higher price higher margin opportunity than the majority of our telecom business, which as governments fulfilled so no real update to provide on timing except for that.
And tell us what is available to order and were expecting some consumer uptake, but I'd say that the potential there is actually at a higher price, yes, karri I agree I think it's consistent with our other commercial business. As you mentioned, we don't give specific guidance on pricing and margins for that particular product line.
It is consistent with our other commercial pricing.
I'd just add at small as far as smaller volume.
Understood. Thank you and then just one follow up I think of the last earnings call you.
Ted you have the capability to producer on the $1 6 million and tell us what tests per week and you expected that should double next year.
Is that still the right way to think about it. Thank you.
Yes, maybe one thing to think about it is we wanted to give a efficient as possible and so one thing that we're looking at with the operations team and the company is really scaling and then Tal swap meet the demand levels and then also not scaling beyond that from a personnel standpoint, because we obviously the costs associated with that and so.
Right now our current capacity is around 2 million tests a week.
From a production standpoint.
We have room to police that further and will if necessary.
Right now we want to really use our resources efficiently and so we're really scaling to meet demand as it comes in.
I appreciate it congrats again.
Thank you.
Thank you please standby.
Right.
Our next question comes from Jacob Johnson from Stephens Jacob Your line is open.
Hey, Thanks, good afternoon, congrats on a nice quarter, maybe just a quick one for Ken.
On the guidance here for Q, you talked about it and tell us a lot sales being down, but obviously kind of a record quarter there <unk> as.
Maybe a way to think about it youre guiding revenue down 15% to $20 million sequentially.
Fair to say, maybe assume the base business is flat in <unk> and COVID-19 down by that much just any kind of color on how we should think about COVID-19 revenues in <unk>.
Yes, I think youre thinking about the right way.
With our with we saw the ramp up in the school program in the beginning of the school year.
Don't expect that to continue in Q4.
So I think thats, what youre thinking of it the correct way as far as the core business relates to that.
Okay. Thanks for that Ken and then <unk>.
Terry maybe kind of a higher level strategic question for you.
So you have some products that go direct to consumer you have others, where youre selling to government agencies, and then you talked about kind of on the collection kit side working with labs.
Maybe the lines are blurring here to some degree.
As health Care Center Island, but I'd just be kind of curious your view of those various channels and as we think about where where ishares going what do you find the most interesting within those avenues.
Jacob I love it because.
It allows us to talk about our different portfolios and the different channels, we serve within each so I would just call out.
Our focus and our strength is effort with point of care diagnostic testing effortless sample collection, and stabilization innovation and effortless microbiome services and innovation and the channels within that what I want to highlight in answering your question is on the Sam.
Collection and stabilization, we think theres, a tremendous opportunity to increasingly power the connection of health care to people, where they are and while that can sound consumer oriented the types of partners, we're talking about serving as our customers or other health care providers and so.
You pointed out clinical lab, it's also health Tech and I think that that opportunity has gained real momentum through COVID-19 and peoples awareness of the diagnostics and the solutions and the shift that is taking place.
I would just emphasize that on the.
On the point of care diagnostics side pay.
Patients and consumers.
That same trend serves to increase the other shift there as well, though I would say.
One of the benefits for us through our Covid experience is really interrelationship, not just with government public health more broadly and so we keep pointing out government, taking a more active role in serving public health need. So in addition to Covid, we really like the HIV example.
But together take me home program is a different space, but represents kind of that same government's involvement improving care for the most vulnerable communities. So I think we're excited about each but different product portfolios and strength for different segments and channels we serve.
Got it Super helpful. Thanks for taking the question.
Thanks Jacob.
Thank you.
Our next question comes from Casey Woodring from J P. Morgan Casey Your line is open.
Hi, guys. Thanks for taking my questions.
I guess the first one is on gross margins. So it looks like they came in below the street and we were flat quarter on quarter.
Some of the cost out initiatives that have already.
Begun.
I guess can you maybe touch on how much runway. There. So is there in order to get cost out of manufacturing process and then you mentioned strength in retail for entellus swap in the quarter wouldn't that drive higher margins for until the swap.
Yes, so I think you're calling out.
Something we tried to share some of the nuance on.
Margins, but while we don't provide specific gross gross margin percentages. There is this sort of.
Balance between the two that I'll, let Ken talk about yes, you are right on the KC as far as the gross margin conversation.
As far as long term, we are looking at opportunities to continue to improve our operational efficiency. We have so we're looking at footprint opportunities.
<unk> opportunities as well as the versions updated versions of our cobot product our tests of our product as far as the gross margin versus expectations part of it think of it is the mix as well.
At a higher diagnostic mix versus the prior quarter and the diagnostic Miss diagnostic margins are lower than our molecular margins overall and that mix impact some of the impact related to that in addition.
In addition.
Scott.
No Ken I think yes, I think that's the primary factor Casey is remember when we gave our guidance last quarter, we were guiding to $90 million to $95 million in revenue and we had about $20 million of additional revenue for Intel will swap. It was more than we had expected and so I was just when you think about the mix impact we did see a nice positive transition in <unk>.
Again on a sequential basis, but some of that was absorbed obviously by the mix changes in the business and so yes.
It will.
And flow is Intel swab increases and decreases in our numbers going forward and I wanted to just circle back around the initial question, which is there is room and we do have plans to take out additional cost in <unk> and beyond and so there is additional room in gross margin for us to continue to improve.
Great that makes that makes sense.
And then I guess just on genomics on the stepped down.
Last quarter, you called out some weakness in the segment related to clinical trial work specifically on some of the biotech funding.
Concerns in that business.
So curious if that also drove part of the decline or was it all consumer.
Then just on the consumer just wondering if you have any visibility into.
Yes.
And a trend in the business will improve at all in <unk>.
Yeah. Thanks Casey.
On the.
DLA front and the microbiome services, we actually saw improvement there. So what we had shared is that we were anticipating that there could be traction traction, which would help drive some positive signal, including research funding and that did that did occur and so we actually had improvement.
The challenge as you correctly noted is clearly and the continued softness softness for our more consumer oriented businesses as well as then just the.
The lack of Covid molecular testing across the board so.
You listened well last quarter, we called it out but the BLA is we actually have progress there on progress in microbiome.
But the softness remains.
We have a long term optimism we believe in the segment for genomics or you're fundamentally believe in it with the move to precision health, but there is still some financial uncertainty.
That remains and we see players shifting inventory mix and and making some moves like that.
I just wanted to be clear.
When we look at some of the consumer partnerships that we announced on the call here for <unk>. Some of the most of those were relatively recent from a timing standpoint, such as Amazon and.
And so they wouldnt really have impacted the third quarter as well as you think about from a mix standpoint.
Got it very helpful. Thank you.
Thanks Kathy.
Thank you.
Our next question comes from Brandon Couillard at Jefferies. Brandon Your line is open.
Hey, Thanks. This is Matt on for Brandon carried in your prepared remarks, you talked about how youre looking to align the cost structure across a number of scenarios as it relates to tell a swab demand looking out kind of into 'twenty, three and Youll give us an update as we get there, but would just love to get your higher level philosophy on that a little bit.
And maybe some of the key buckets and levers available to you as we tend to think about the various scenarios that could play out next year. Thanks.
Thanks, Matt.
You're clearly footprint consolidation and optimization is a is a big one of those if you just think about that the operations that we have to to support that when we think about it.
Cost structure in alignment with the business of today and Tomorrow, you know one of the moves we have made earlier in the year was to centralize operations of the corporate function. We had introduced backward as our new SVP of operations up to a terrific start but really that.
Manufacturing efficiency and the footprint consolidation.
Asian potential is a big part of that I'd say another is in automation.
And really leveraging the.
The potential for other products in our portfolio to leverage the Super factory concept and automation and footprint consolidation. So if you think about kind of big chunks. There is structural cost chunks. There are operating expense chucks and then there are cost of goods sold and and unit cost.
<unk> chunks and we're going after all three of those.
Scott anything you want to add on that.
Matt anything else.
Yes, one other one.
Talked about to you about the new packaging you submitted the FDA can you just give us an update on kind of what's the turnaround time for that and when that could maybe patel.
Potentially start to ramp and then is there any way to quantify at a high level. The impact of cost. If you were able to switch over HIV HCV Ebola business today onto that.
Product kind of like how meaningful could the.
B to your cost structure today.
Thanks.
Yes, Matt.
Always tough with updated timelines and so we're not really studying any kind of guidance around it.
Submitted.
Configuration to them.
So we'll just have to see how long it takes them to respond to that but it's something that we're excited about I.
I think when you think about the transition of the other tests over to the new lines Theres definitely efficiencies. We're in the process right now of kind of scaling your.
How significant those could be as we look at our production plan.
<unk> and <unk>.
Well utilized and so I think it's a little bit early to kind of give any type of cost estimates associated with that transition, but we believe it will be pretty meaningful for those tests as we make that transition in the future.
Super Thank you.
Thanks, Matt.
Yeah.
Thank you.
Now I'd like to turn it back to Scott and team for any closing remarks.
Yes.
Thanks, Shannon and we wanted to thank everybody for participating in today's call and your continued interest in <unk> have a great evening and stay safe and be well.
Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.
Okay.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Hmm.
Okay.
Okay.
[music].
Yes.