Q2 2023 OraSure Technologies Inc Earnings Call
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Good day and thank you for standing by welcome to the oral sure technologies 2023 second 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 message advising your hand is raised to withdraw your question. Please press star one again.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your Speaker today, Jason Parkman, Vice President of Investor Relations. Please go ahead.
Good afternoon, and welcome to Orasure Technologies' second quarter 2023 earnings call participating on the call today from our share our Carrie Eglinton manner, our president and Chief Executive Officer, and Kevin Mcgrath, Our Chief Financial Officer.
A reminder, today's webcast are being recorded and the recording can be found on our Investor Relations website.
Before we begin you should know that this call may contain certain forward looking statements, including statements with respect to revenues expenses profitability earnings or loss per share and other financial performance.
Development performance shipments and markets business plans regulatory filings and approvals expectations and strategies actual results could be significantly different factor.
Factors that could affect results are discussed more fully in the company's SEC filings, including its registration statements. Its annual report on Form 10-K for the year ended December 31 2022.
Early reports on Form 10-Q, and its other SEC filings.
Although forward looking statements help to provide more complete information about future prospects listeners.
Keep in mind that forward looking statements are based solely on 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.
Please note that we will be discussing certain non-GAAP financial measures that we believe are important in evaluating <unk> performance.
Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliations thereof can be found in the press release that is posted on our website.
With that I am pleased to turn the call over to Kerry.
Thanks, Jason and we appreciate each of you joining us today, we are pleased to provide an update on the progress that or if youre, making on the three pillars of our strategic transformation. That's first strengthening our foundation next elevating our core growth and also accelerating.
The bar graph.
Notable highlights during the quarter include we.
We generated $57 million of operating cash flow in Q2 and grew our cash balance to $186 million.
We executed to deliver stronger than anticipated and tell us what volumes on our COVID-19 contracts during the quarter and in July we received orders under existing contracts for delivery of additional and tell us what the devices. When these orders are expected to generate at least $70 million of revenue.
In the second half of 2023.
We unlocked incremental cost savings as a part of our ongoing enterprise wide focus on driving improved operating efficiency. We also delivered core revenue growth on both a sequential and a year over year basis.
And with our stronger balance sheet, we are investing internally and externally to support and enhance our leadership position and grow in our key portfolios.
Rigorous portfolio processes are helping invigorate, our innovation road map with organic and inorganic opportunities, including strategic partnerships that we believe can provide additional fuel for growth.
Next on costs.
As we continue to strengthen our foundation, we remain highly focused on delivering greater operating efficiency, including in cost reduction.
The second quarter reflects a full quarter of impact from the head count reductions we made in February and we've implemented additional expense reduction initiatives. Since then but are expected to reduce both our production costs as well as our non production related expenses.
During the quarter, we made progress consolidating our manufacturing facility footprint to drive operating efficiencies, including re shoring some of our capacity to the U S to leverage innovative automation capabilities that we have developed we also continued to make progress on the installation and testing.
New equipment and manufacturing processes at our Opus wave facility. In addition to our existing automation production of our or our click platform as discussed in prior quarters. We expect this phase of Opus way expansion to be completed in 2023.
Overall, we expect to generate additional operating efficiencies across our enterprise in the second half of this year and into 2024, including further consolidation of facilities.
Dean of automation and controlling our non production costs.
These initiatives, including incorporating lean six Sigma training and methodologies across multiple functions of the company.
Our efforts to breakeven and operating cash flow on our core business by the end of 2020 for a target, which we remain on track to deliver.
And tell us what volumes were stronger than expected in Q2, and we generated 47 and a half million dollars in revenue from our COVID-19 products during the quarter as I mentioned earlier, we received purchase orders in July under existing contracts for delivery of and tell us what the devices.
Overall, we are really proud of our work with our public health partners and we believe that the additional visibility improves readiness for a potential infectious disease outbreaks in the U S and beyond.
As we've discussed previously.
I also believe the cash generated from Intel a swab plus the cost reductions we have implemented will help us fund investments in innovation and future growth opportunities in order to elevate sustainable growth in our core portfolio.
On our core business, which excludes revenue from Covid related products.
They grew 4% sequentially this quarter and 3% on a year over year basis.
Our HIV franchise, we mentioned during our Q1 earnings call that we saw strong start to the together take me home program, which is funded by the CDC. This five year program focuses on providing free in home testing to at risk in underserved populations nationwide.
We believe the early momentum of this program could create additional opportunities for our infectious disease business.
Moving to hepatitis C.
Revenue grew on both a year over year and a sequential basis driven by strength in domestic segment. We continue to be encouraged by the increasing recognition among health officials of the need to increase eight Tvs surveillance and data collection through outreach testing.
Shifting to molecular products revenue grew 1% sequentially in Q2, representing the second consecutive quarter of modest sequential improvement.
Well end segments have experienced sources that we've discussed previously we are seeing some positive signs, including continued momentum in establishing new partnerships and commercial relationship.
The mentally we believe in the long term potential of molecular testing as an enabler of precision health on that front. We are very pleased to announce a collaboration to work on a multi year project with the Regeneron Genetics Center, a wholly owned subsidiary of Regeneron Pharmaceuticals, Inc.
That focuses on early gene discovery and functional genomics.
D. C has chosen our origin device for all saliva collection requirements, along with leveraging our in house Kidding and single order fulfillment services to remodel it's DNA collection workflow.
Also on our molecular product portfolio, we continue to make clinical and commercial progress with quality. We recently signed an agreement with the international vaccine Institute Ivy I to utilize our colleague Pete first void volumetric urine collection kits as part of a research study to under.
Stand the burden of human Papilloma virus, HPV, among girls and women and low and lower middle income countries. The International vaccine Institute as an organization with a mission to discover develop and deliver safe effective and affordable vaccines for global health.
Study will help inform intervention implementation.
And prioritization of research and development effort that have the greatest potential for public health impact. We believe the first void urine has the potential to provide powerful insights through noninvasive sample collection methods that can transform the approach to HBV patient screening.
Vaccination and treatment strategies, regardless of a patients geographical proximity to or familiarity with professional health care settings.
Effortless at home sample collection, it's fundamental to how our offerings can help power the shift in health care delivery that connects care with patients and consumers wherever they are.
These ongoing and prior studies demonstrate the value of Kali Pee urine collection as an easy to use noninvasive itself them self sampling device.
And Orissa is committed to delivering an evidence based affordable solution with improved patient experience for people around the globe.
Microbiome is another emerging science that has the potential to contribute to precision health innovation, our microbiome collection devices and services are used to advance research direct to consumer and clinical applications in the space of note is the pioneering work done by our biotech customer.
As to leverage the power of the microbiome in developing new therapeutics, one such customer is a serious therapeutics serious a commercial stage company developing novel Microbiome Therapeutics, and Nestle Health Science, a leader in the science of nutrition have jointly announced the FDA approved.
All of the first and only orally administered microbiota based therapeutic valves.
To prevent recurrence of C difficile infection, or CDI and adult following anti bacterial treatments for recurrent C diff infection.
The FDA approval of valves was supported by a robust phase III development program.
That included the eco sport three and it goes or four studies.
Berkshire subsidiary the first agenda provided the microbiome sequencing services for this series of studies and our plans to say the FDA approval for this important new oral treatment option for C diff infection.
On our innovation roadmap. In addition to our current product portfolio, we continue to make progress on our initiatives to accelerate profitable growth through investments in our internal product development pipeline as well as potential external investments partnerships and acquisitions enabled by the strengthening.
Of our balance sheets during the last year.
We have discussed in prior quarters that in diagnostics, we are working on opportunities to expand our portfolio of assays in areas, where we have existing strong capabilities such as in infectious disease respiratory influenza and sexual health, we expect to share more on these opportunities.
Later this year.
In molecular over the past few quarters, we have shared our progress and new collaborations and precision health is.
Great to see those partners such as quest diagnostics grip, both N V wed launching their new offerings across a broad range of use cases, such as consumer initiated testing.
Isn't that a counseling services as well as disease specific testing overall, we believe orasure is well positioned to be the partner of choice to help power precision health due to several important differentiators.
One the quality and reliability of our offerings and the expanded patient reach they enable to the consistency of our delivery and execution and three our track record of collaborating with our partners and successfully navigating complex regulatory approval processes for segment.
Access and expansion with that I'd like to turn the call over to Ken to discuss our financial results and guidance.
Thanks, Terry I'm happy to discuss our financial results for the second quarter of 2023 and provide updates on our financial outlook.
We delivered total revenue of $84 5 million in Q2.
Representing 6% year over year growth.
COVID-19 products, including Impella swap contributed $47 5 million of revenue in the second quarter and grew 10% on a year over year basis.
Purchasing patterns under our contracts with the federal government with stronger than expected during the quarter.
Total quarter core revenue, which excludes Kobe products was $37 9 million in the second quarter reps.
Representing 4% sequential growth and 3% year over year growth.
Within core revenue, our core diagnostic products generated $19 8 million in Q2.
Grew 41% year over year.
Strong growth was driven by significant domestic HIV sales bolstered by the two together take me home program as well as growth internationally HIV sales.
Looking at our core molecular products total revenue of $13 1 million decreased 26% year over year.
On a sequential basis electrical products revenue grew 1%.
As we expected we continue to see muted question patterns from a few large customers during the quarter.
That said, we are seeing some signs of stabilization with current customers as well as opportunities in new areas.
From a gross margin perspective, our GAAP gross margin in the second quarter was 39%.
GAAP gross margin declined significantly compared to the prior quarter, which was primarily attributable to the impact of accelerated depreciation and inventory reserves related to the wind down of our manufacturing operations in Thailand.
non-GAAP gross margin was 42% in the second quarter.
And declined slightly compared to the prior quarter, which was previewed last call.
The decline was primarily attributable to the fact that a large portion of our telephone volumes during Q2 for our contract with a lower selling price.
The impact of this pricing headwind was partially offset by savings from entellus, Walt packaging redesign that we discussed in prior quarters as well as other cost reductions we go to market this year.
Looking ahead, we are focused on driving efficiencies across our entire portfolio of products and services, including site consolidation product standardization procurement savings and further leveraging our automation capabilities at our <unk> facility.
Shifting to operating expenses, our GAAP operating expenses in the quarter was $32 8 million, which decreased by $8 7 million compared to Q1.
Our non-GAAP operating expenses were $29 1 million in Q2, which.
Which decreased by $4 5 million compared to Q1.
Primarily due to our head count reductions in February .
We are focused on driving additional efficiencies in our non production expenses in the coming quarters.
These savings are important as we look to utilize cash for growth investments and as we are committed to achieving breakeven operating cash flow in our core business by the end of 2024.
This quarter, our GAAP operating income was a loss of $6 4 million.
This compares to GAAP operating loss of $21 5 million in last year's second quarter.
non-GAAP operating income was a positive $6 7 million in the second quarter.
non-GAAP operating income in last year's second quarter was a loss of $1 2 million.
We ended the quarter with zero debt and total cash and cash equivalents of $186 million, which is up from $112 million last quarter.
The increase in our cash balance was primarily driven by strong collections on accounts receivable as well as receipt of $18 million from the U S Department of defense related to the achievement of milestones at our <unk> facility.
The majority of the cash expenditures tied to this expansion has been completed.
And we have $31 million remaining and milestone payments from the government.
Turning to guidance.
We are guiding to third quarter revenue of $72 million to $77 million.
Which includes core revenue of 37% to $39 million and <unk> revenue of 35% to $38 million.
As Terry discussed in July we received purchase orders under one of our existing contracts with the federal government for delivery of Intel's swap devices.
These orders are expected to contribute at least $70 million of revenue in the second half of 2023.
Additionally, as part of our ongoing focus on enterprise wide operating efficiency.
We are on track to exceed the $15 million of annualized cost savings announced in Q1 2023.
With that I'll turn the call back over to Terry to conclude thanks.
Thanks, Ken and just to clarify our second quarter revenue was $85 $4 million not 84 five.
And in summary, during the second quarter, we delivered significant progress on our strategic priorities.
We strengthened our foundation by generating significant positive cash flow and continue driving operating efficiencies discipline and accountability across our enterprise, while executing on online call swap contract.
We delivered positive core growth, which was due to the dedication of our team members providing value for our customers partners and patients.
And we continue to make investments to strengthen and expand the leadership position of our products and services in order to accelerate our profitable growth in the coming years.
Overall, we are confident that orasure is foundational capabilities concurrent strength.
Position us for success as we aim to help power the shift in health care delivery.
Meeting people patients, where they are to increase access affordability and quality of care with that I'm happy to turn the call back to the operator for Q&A.
Operator.
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 to withdraw your question. Please press star one again.
One moment, while we compile the Q&A roster.
Our first question comes from Patrick Donnelly with Citi. Your line is open.
This is brendan on for Patrick Congrats.
Congrats on the quarter first off I apologize if you guys already went over this but I wonder if can you go over the cadence for the second half of the year for the Intel swap revenue so.
So I know you said that there were around $70 million of new orders loved and ground 30 left to your older contracts.
How should we think about that in the second half of the year.
Yeah, So our guidance and then if I could.
Thank you for the question our guidance for second half to $70 million of <unk> revenue.
And then what we guided in our guidance for the Q3 was 35% to $38 million. So you can imagine and another 35 for Q4 as we go forward.
Because that means that the rest of your question there.
Yes. Thank you and then one follow up for the.
Stop HIV together program and you guys have talked about that program expanding I wonder is there been any movement and possible expansion of that program and when.
Maybe talk us through that.
Yeah, we continue to have great relationships with the CDC when it comes to this program.
We've had a lot of success.
They want to continue it at a time potentially accelerated as we go forward.
Pleased with the efforts and what they are learning there is the importance of this channel to get out to underserved populations.
As we go forward.
So I can say off to a really good start.
And.
We'll continue to update.
Every one on the strength of HIV in the core, but we do think that the momentum of that program has the potential to help our infectious disease business overall, as we're reaching underserved populations and really increasing access to the.
The HIV diagnostic.
Great. Thank you so much congrats again on the quarter.
Thanks Brendan.
One moment for our next question.
Oh.
Our next question comes from Jason Jacob Johnson with Stephens. Your line is open.
Hey, good afternoon.
Carey good afternoon, everybody, maybe Ken just first on the third quarter guidance.
The base business revenues grew sequentially this quarter, but but if my maths right I think the third quarter guidance implies the base business as a kind of flat to down a bit can you just talk about anything we need to consider from a seasonal perspective as youre thinking about the base business in the third quarter.
Yes, we did have to your point, we saw a very strong Q2, and some of our lines of business and we are expecting we feel in the molecular business.
We did see some solid stabilization in the core business of the business.
And as far as diagnostics.
Seeing some strong growth.
What we saw in Q2 around our domestic and international business.
We believe that again, the molecular we're maintaining that stabilized position.
As well as in the guide and as well as the diagnostics business.
So whether it is flat and you know we're sort.
Guiding in that flat to sort of slight slight growth range.
Okay.
Makes sense and then carry maybe just on.
Molecular products, you've talked about some of the headwinds do you face there, but you've announced a variety of partnerships.
As it relates to that segment can you just talk about how we should think about the revenue contribution from these partnerships, maybe kind of near term versus long term and what the ramp for.
Some of those relationships could look like.
Yeah.
As we continue to say, we believe in the long term potential of molecular and then it really is the foundation for precision health.
Well, while we don't call out specific guidance I think you know.
What we've been trying to do is show the momentum where molecular collection is increasingly expanding from what has been kind of a direct to consumer historic in the clinical space and into other applications where.
Again, Jacob where where we will share more specifically as we have it but fundamentally I think think about that as this increasing pipeline of opportunity that is molecular and markets you see those recoveries that we fully expect to grow.
With those end markets as they grow.
So yeah. Good good news across the board and I think we're all looking for the continuous signs of recovery with.
With the big players and you know who they are.
Got it alright.
Alright ill leave it there thanks for taking the questions Gary.
Thanks Jacob.
One moment for our next question.
Our next question comes from Brandon Couillard with Jefferies. Your line is open.
Thanks. This is Matt on for Brandon, maybe one for you gross margin at 42% in the quarter down slightly as we've previously spoken about.
Mitch I'm curious how that 42% came in.
Relative to your expectations or any of the tier ones you called out from the cost reduction the package redesign costs better than expected in the quarter and then any color on how to think about gross margins here either in <unk> for the back half of the year and you list.
Some additional efficiencies youre kind of focused on will those show up here in the back half or are those more 24 and beyond benefits. Thanks.
Great question and I Hope you all get to all your answers here, yes. So for Q2, we did see better than expected margins.
It came from two areas as you described we had earlier implementation of our version two packaging, where we saw a better benefit than expected. In addition, what we saw with a better mix or a stronger mix and stronger volume for our total swap business, which drove it.
Going forward, we do expect the Intel a swap volume going forward and the remaining volume to be at the higher price I think we quoted in the past about a $5 price.
We expect that going forward, so that should see.
Solid improvement to our margins as well as what you described we're seeing improvements from the efficiencies we put in place.
Whether it's the packaging efficiencies operational efficiencies the footprint consolidations efficiencies and Terry mentioned the reassuring.
Our Thailand facility into our Opus way as well as driving automation.
We've been leveraging automation not just unintelligible deleveraging in our other segments and other platforms.
That's helpful.
One for you can you guys ended the quarter with $186 million of cash that you've previously talked about some working capital benefits.
You're around to tell us all both from an inventory standpoint, and then accounts receivable that were in total north of $100 million obviously.
So a pretty big swing during the quarter inventories relatively flat do you expect to still see that full unwind and.
And the benefit from that to cash or is there. Some changed just given this $70 million of border and maybe how youre thinking about inventory for Intel side here in the back half of the year and maybe even into 24. Thanks.
Yeah, Great Great question, and thanks for asking that yeah. So in Q2, we saw three areas due to the hard work of the team to improve we saw like you said an improvement in accounts receivable.
A slight improvement in inventory and then we got some milestone payments from the government to the hard working team, we expect to see though there has improved.
Yes going forward in the second half as well, we expect to continue to receive all of our remaining accounts receivable still a big portion of it is going to tell us while related and government related.
As well as we expect to see inventory draw down as we go forward in second half.
And then we do expect to have we mentioned about $31 million of remaining milestone payments related to the government and we are we have spent most of the expenses related to that program. So now it's a matter of proving it out and get a government approval for those milestones and then receiving those payments.
Thanks, and then just one last quick one I think you guys said on the incremental it's also borders it could at least $70 million should we think about that as a floor and is it possible that there could be potential upside to that moving through the back half of the year. Thank you.
Yes, great question and the way we're looking at is Thats, what we have visibility to right. Now you can imagine theres, sometimes seasonal ordering patterns that could change that so we wanted to provide a number then we have visibility to at this time for the second half.
As you can in our guidance you saw we split that roughly evenly between Q3 and Q4.
Oh.
Super I'll leave it there thank you.
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.
Yeah.
I'm showing no further questions at this time I would like to turn the call back to Carrie Eglinton manner for closing remarks.
Great. Thank you we appreciate everyone participating in our call today. We appreciate your continued interest in Orissa and.
We will talk to you next quarter. Thank you.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
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