Q4 2023 OraSure Technologies Inc Earnings Call

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Operator: Good day, and thank you for standing by. Welcome to the OraSure Technologies Inc. 2023 Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode.

Speaker Change: Good day and thank you for standing by welcome to the Orasure Technologies, Inc, 2023 fourth quarter earnings Conference call.

Speaker Change: At this time all participants are in a listen only mode.

Operator: 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 on your telephone. You will then hear an automated message advising that your hand is raised.

Speaker Change: After the speaker's presentation, there will be a question and answer session.

Speaker Change: To ask a question during the session you will need to press star one one on your telephone.

Speaker Change: We'll then hear an automated message you're advising your hand is raised to.

Jason Plagman: To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jason Plagman, Vice President of Investor Relations. Please go ahead.

Speaker Change: To withdraw your question. Please press star one again.

Speaker Change: Please be advised that today's conference is being recorded.

Speaker Change: I'd now like to hand, the conference over to your first speaker today, Jason <unk>, Vice President of Investor Relations. Please go ahead.

Speaker Change: Okay.

Jason Plagman: Good afternoon, and welcome to OraSure Technologies' fourth quarter 2023 earnings call. Participating in the call today for OTI are Kerry Eglinton-Manner, our President and Chief Executive Officer, and Ken McGrath, our Chief Financial Officer. As a reminder, today's webcast is being recorded, and the recording can be found on our investor relations website. Before we begin, you should know that this call may contain certain forward-looking statements, including statements with respect to revenues and guidance, expenses, profitability, earnings or loss per share, and other financial performance, product development, performance, shipments and markets, business plans, regulatory filings and approvals, expectations, and strategies. However, actual results could significantly differ.

Jason: Good afternoon, and welcome to <unk> technologies fourth quarter 2023 earnings call participating in the call today for OTI or Carrie Eglinton manner, our president and Chief Executive Officer, and Kevin Mcgrath, Our Chief Financial Officer.

Jason: As a reminder, today's webcast is being recorded and the recording can be found on our Investor Relations website.

Jason: Before we begin you should know that this call may contain certain forward looking statements, including statements with respect to revenues and guidance expenses profitability earnings or loss per share and other financial performance product development performance shipments shipments and markets business plans regulatory filings and approvals.

Jason: Spectation and strategies actual results could significantly significantly differ.

Jason Plagman: Factors that could affect results are discussed more fully in OTI's SEC filings, including its registration statements, its annual report on Form 10-K for the year ended December 31, 2022, quarterly reports on Form 10-Q, and its other FTC 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 information available to management as of today. OCI undertakes no obligation to update any forward-looking statements to reflect events or circumstances after this call. With that said, I am pleased to turn the call over to Keri. Thanks, Jason.

Jason: Factors that could affect results are discussed more fully in OTI SEC filings, including its registration statements. Its annual report on Form 10-K for the year ended December 31 2022 quarters.

Jason: Quarterly quarterly reports on Form 10-Q, and its other SEC filings.

Jason: Although forward looking statements help to provide complete information about <unk>.

Jason: Future prospects listeners should keep in mind that forward looking statements are based solely on information available to management as of today.

Jason: Undertakes no obligation to update any forward looking statements to reflect events or circumstances. After this call with that I am pleased to turn the call over to Kerry.

Kerry Eglinton-Manner: And thank you to everyone for joining us today. We are pleased to provide an update on the progress OraSure is making on the three pillars of our strategic transformation. One, strengthening our foundation, two, accelerating our core growth, and three, accelerating profitable growth. A few notable items since last quarter include that we generated $41 million of operating cash flow in Q4 and grew our cash balance to $290 million. For the full year 2023, our cash and short-term investments increased by $180 million.

Jason and thank you to everyone for joining US today, we're pleased to provide an update on the progress or if youre, making on the three pillars of our strategic transformation.

Kerry: Strengthening our foundation to elevating our core growth and three accelerating profitable growth a few notable items since last quarter include that we generated $41 million of operating cash flow in Q4 and grew our cash balance to 290.

Kerry: <unk> million dollars.

Kerry: For the full year 2023, our cash and short term investments increased by $180 million.

Kerry Eglinton-Manner: We continue to execute on our COVID-19 contract, and we delivered stronger than anticipated IntelliSwap volumes during the quarter. Our enterprise-wide focus on driving improved operating efficiency continues to unlock incremental cost savings, including gross margin expansion and reduced overhead expenses. In February, we signed a strategic distribution agreement with Diagnostics Direct, which allows us to enter the U.S. syphilis testing market with the first CLIA-waved trepon

Kerry: We continue to execute on our COVID-19 contracts and.

Kerry: We delivered stronger than anticipated and tell us what volumes during the quarter.

Kerry: Our enterprise wide focus on driving improved operating efficiency continues to unlock incremental cost savings, including gross margin expansion and reduced overhead expenses.

Kerry: In February we signed a strategic distribution agreement with diagnostics direct which allows us to enter the U S. Syphilis testing market with the first CLIA waived Treponemal test of course earlier in the quarter, We also announced our investment and strategic distribution relationships.

Kerry Eglinton-Manner: Of course, earlier in the quarter, we also announced our investment and strategic distribution relationship with Sapros, a consumer diagnostics company with unique technology platforms that plan to enable low-cost, high-performance, next-generation diagnostics and sample collection devices. We expect that distribution of Saffros's products will add at least two percentage points to revenue growth in our core business beginning in 2025. Starting with cost, as we continue to strengthen our foundation, for the full year of 2023, we exceeded our target of $15 million in annualized cost.

Kerry: With that for us our consumer diagnostics company with unique technology platforms. The plan to enable low cost high performance next generation diagnostics and sample collection devices. We expect the distribution of <unk> products will add at least two percentage points to revenue growth in our core.

Kerry: Core business beginning in 2025.

Kerry: Starting with costs as we continue to strengthen our foundation for the full year of 2023, we exceeded our target of $15 million in annualized cost savings.

Kerry: Over the last.

18 months, we have developed an enterprise wide mindset that is focused on continuous improvement and operational efficiency as such we have identified and are working a number of opportunities that are expected to generate additional productivity enhancements and cost reductions in 2024 and beyond.

Kerry: Including consolidating facilities further leveraging our automation capabilities and managing our non production costs.

Kerry Eglinton-Manner: Over the last 18 months, we have developed an enterprise-wide mindset that is focused on continuous improvement and operational efficiency. As such, we have identified and are working on a number of opportunities that are expected to generate additional productivity enhancements and cost reductions in 2024 and beyond, including consolidating facilities, further leveraging our automation capabilities, and managing our non-production costs. These initiatives give us confidence in achieving our target of operating cash flow break even for our core business by the end of 2024. As we previewed on our last earnings call, in Q4, we collected the final milestone payments from the U.S. government related to the completion of our capacity expansion at our Opus Way facility in Bethlehem, Pennsylvania. We also continued to make progress on consolidating our footprint by transitioning one of our distribution facilities into Opus Way in order to unlock operating efficiencies and cost savings while moving to COVID-19. Intelliswap generated $42 million in revenue in Q4.

Kerry: These initiatives give us confidence in achieving our target of operating cash flow breakeven for our core business by the end of 2024.

Kerry: As we previewed on our last earnings call in Q4, we collected the final milestone payments from the U S government related to the completion of our capacity expansion at our Opus wave facility in Bethlehem, Pennsylvania. We also continued to make progress on consolidating our footprint.

Kerry: Transitioning one of our distribution facilities into opus way in order to unlock operating efficiencies and cost savings.

Kerry: Moving to COVID-19.

Kerry: <unk> generated $42 million of revenue in Q4, as we discussed last quarter, we have visibility to order trends that are expected to fulfill the remaining portion of our largest contract with the us government and complete our deliveries during the first half of 2024.

Kerry: Looking at our core business, which excludes COVID-19 related products core revenue in Q4 increased slightly on a year over year basis.

Kerry: Core revenue growth was primarily driven by strong HIV sales in the U S and international markets, which were partially offset by declines in non product revenue and molecular lab services.

Kerry: We've discussed for the past 18 months that external partnerships are a fundamental part of our strategy to drive profitable growth in our core we continue to execute on each of our initiatives to accelerate our innovation pipeline and expand our product portfolio. We have been sharing examples of strategic distribution.

Kerry Eglinton-Manner: As we discussed last quarter, we have visibility to order trends that are expected to fulfill the remaining portion of our largest contract with the U.S. government and complete our deliveries during the first half of 2024. Looking at our core business, which excludes COVID-related products, core revenue in Q4 increased slightly on a year-over-year basis. Core revenue growth was primarily driven by strong HIV sales in the U.S. and international markets, which were partially offset by declines in non-product revenue and molecular lab services.

Kerry: <unk> agreements that build upon our existing strengths and areas such as infectious disease and sexual health.

Kerry: Along those lines, we are delighted to announce a new agreements with diagnostics direct a new Jersey based innovator that allows us to distribute their surplus health check on a semi exclusive basis in the U S.

Kerry: Syphilis is a growing public health epidemic and diagnostic direct syphilis health check is the first FDA cleared CLIA waived rapid point of care syphilis test earlier. This month, the CDC released new recommendations on syphilis testing.

Kerry Eglinton-Manner: We've discussed for the past 18 months that external partnerships are a fundamental part of our strategy to drive profitable growth in our core business. We continue to execute on each of our initiatives to accelerate our innovation pipeline and expand our product portfolio. We've been sharing examples of strategic distribution agreements that build upon our existing strengths in areas such as infectious disease and sexual health. Along those lines, we are delighted to announce a new agreement with Diagnostics Direct, a New Jersey-based innovator, that allows us to distribute their simplest health check on a semi-exclusive basis in the U.S. Syphilis is a growing public health epidemic, and Diagnostics Direct's Syphilis Health Check is the first FDA-cleared, CLIA-waived, rapid point-of-care syphilis Earlier this month, the CDC released new recommendations on syphilis testing, explicitly stating that, quote, an accurate POC serologic antibody test for syphilis can shorten the time to treatment because the infection can be identified at the time of the visit or encounter. end quote

Kerry: Let's at least stating that quote accurate POC serologic antibody test for syphilis can shorten the time to treatment because the infection can be identified at the time of the visit or encounter end quote.

Kerry: Our agreement with diagnostics direct allows us to enter the U S syphilis testing market.

All channels and customers aside from a defined group of clients, whom diagnostics direct will continue to directly support.

Kerry: And in Italy, we are excited to add <unk> health checks to our sexual health portfolio and we view it as an important tool in the nation's response to syphilis as a public health crisis.

Kerry: And for clinical care more broadly.

Kerry: In addition to diagnostics, we are also expanding our portfolio our portfolio in other important product categories.

Kerry: And our substance abuse testing business, we've entered into an agreement with Veritas USA to be a distributor for swab tech and easy to use surface testing technology that can quickly detect and differentiate concealed substances. We are pleased to add the swab test.

Kerry: <unk> to our portfolio of drug and alcohol testing products, allowing us to help keep workplaces schools and other critical environment safe.

Kerry: In molecular sample management solutions, we have entered into an agreement with anaerobes systems to be a distributor of portions of their microbiome portfolio anaerobe systems as a manufacturer of high quality anaerobic culture kits and media that are highly complementary to ours.

Kerry Eglinton-Manner: Our agreement with Diagnostics Direct allows us to enter the U.S. syphilis testing market, serving all channels and customers, aside from a defined group of clients whom Diagnostics Direct will continue to directly support. Fundamentally, we are excited to add syphilis health check to our sexual health portfolio, and we view it as an important tool in the nation's response to syphilis as a public health crisis and for clinical care more broadly In addition to diagnostics, we are also expanding our portfolio in other important product categories. For instance, in our substance abuse testing business, we've entered into an agreement with Veritech USA to be a distributor for SwabTech, an easy-to-use surface testing technology that can quickly detect and differentiate concealed substances. We are pleased to add the SwabTech kits to our portfolio of drug and alcohol testing products, allowing us to help keep workplaces, schools, and other critical environments safe. For Molecular Sample Management Solutions, we have entered into an agreement with Anaerobe Systems to be a distributor of portions of their microbiome portfolio. Anaerobic Systems is a manufacturer of high-quality anaerobic culture kits and media that are highly complementary to our microbiome portfolio.

Kerry: Microbiome portfolio OTI will be the exclusive distributor of the biome preserve anaerobic microbiome collection kits in order to better serve our clients with more comprehensive solutions.

Kerry: Shifting to our current portfolio of molecular sample management solutions fourth quarter revenue from those products was consistent with our expectations and we continued to create positive momentum and establishing new partnerships and commercial relationship.

We are also extending relationships across segments.

Kerry: And have signed multiyear agreements with a diverse set of existing customers, which we believe demonstrates their confidence and commitment to the long term opportunities in the genomics market.

Kerry: As an example, we signed a multiyear agreement with <unk> to provide saliva collection devices that will be used for pediatric exome and genome testing <unk>.

Kerry: <unk> is a pioneering enforced in medical genetics working to expand access to diagnostic insight.

Kerry: Specially those focused on pediatric patients with neuro developmental delays and rare disease.

Kerry: Looking at the overall market environment as we entered 2024, we see and the segments that remains subdued as our customers adapt to the post pandemic environment macroeconomic uncertainty and evolving priorities research and otherwise.

Kerry: Those factors and the uncertainty and timing for a sustained recovery as a resulting in the muted outlook for core revenue in the first quarter.

Kerry: For the full year 2024, and beyond we remain confident in our opportunity to deliver core growth.

Kerry Eglinton-Manner: OTI will be the exclusive distributor of the Biome Preserve Anaerobic Microbiome Collection Kit in order to better serve our clients with more comprehensive solutions. Shifting to our current portfolio of molecular sample management solutions, fourth-quarter revenue from those products was consistent with our expectations, and we continue to create positive momentum in establishing new partnerships and commercial relationships. We are also extending relationships across segments and have signed multi-year agreements with a diverse set of existing customers, which we believe demonstrates their confidence and commitment to the long-term opportunities in the genomics market. As an example, we signed a multi-year agreement with GeneDx to provide saliva collection devices that will be used for pediatric exome and genome tests. GeneDx is a pioneering force in medical genetics, working to expand access to diagnostic insights, especially those focused on pediatric patients with neurodevelopmental delays and rare diseases.

Kerry: Our view is supported by multiple factors.

Kerry: First the expansion of our product portfolio through the distribution agreements, we've been discussing which leverage our sales infrastructure and customer relationships.

Kerry: We expect the contribution from these agreements to increase as we move through the year.

Kerry: Second our success over the last two years in diversifying our client base through the addition of new and expanded relationships with diagnostics pharma and biotech companies along with other innovators, we expect the revenue from customer relationships that we've launched in recent quarters.

Kerry: We will continue to grow during 2024.

Third our current expectations for ordering patterns from our sample management solutions from some of our key customers throughout 2024.

Kerry: Fourth our view.

Kerry: Blair to outlooks discussed by our peers and others externally that underlying market growth in the life Sciences industry will begin to improve in the second half of 2024.

Kerry: Turning to our innovation roadmap, we continue to make progress on our initiatives to accelerate profitable growth through organic and inorganic investments at the beginning of the year, we announced our strategic relationship and investment in <unk> as.

Kerry Eglinton-Manner: Looking at the overall market environment as we entered 2024, we see end segments that remain subdued as our customers adapt to the post-pandemic environment, macroeconomic uncertainty, and evolving priorities, research, and otherwise. Those factors and the uncertainty in timing for sustained recovery are resulting in a muted outlook for core revenue in the first quarter. However, for the full year 2024 and beyond, we remain confident in our opportunity to deliver core growth. Our view is supported by multiple factors.

Kerry: As a part of this partnership OTI gains exclusive commercial and distribution rights for key product lines in.

Kerry: <unk> development pipeline that are expected to strengthen our portfolio such as blood collection devices and new diagnostic tests. We also see opportunities for co funding and co development of additional additional innovative offerings as our partnership progressive overall the partnership is.

Kerry: Off to a great start and our teams are working really well together in multiple areas, including R&D collaboration.

Kerry: And in preparation for the future launch of that process initial self collected small volume blood product timing of course subject to subject to regulatory radio.

Kerry: As we discussed in January from a financial standpoint, we expect distribution of <unk> products to add at least two percentage points to revenue growth in our core business beginning in 2025.

Kerry Eglinton-Manner: First, the expansion of our product portfolio through the distribution agreements we've been discussing, which leverage our sales infrastructure and customer relationships. We expect the contribution from these agreements to increase as we move through the year. Second, we have been successful over the last two years in diversifying our client base through the addition of new and expanded relationships with diagnostic, pharma, and biotech companies, along with other innovators. We expect the revenue from customer relationships that we've launched in recent quarters will continue to grow during 2024. Third, our current expectations for ordering patterns from our sample management solutions from some of our key customers throughout 2024. Fourth, our view, similar to outlooks discussed by our peers and others externally, that underlying market growth in the life sciences industry will begin to improve in the second half of 2024.

Kerry: Sales of <unk> products are expected to be accretive.

Kerry: Two <unk> operating profit beginning in 2026, due to our ability to leverage our existing infrastructure capabilities and customer relationships.

Kerry: We anticipate a modest amount of incremental SG&A expense in 2024, and 2025 to successfully launch new <unk> products in the market.

And we believe our investment in <unk> is an efficient method to deploy capital preserving flexibility for additional organic and inorganic innovation.

Kerry: With that I'd like to turn the call over to Ken to discuss our financial results and guidance.

Ken: Thanks, Gary.

Ken: As we discuss our results for the fourth quarter of 2023 and provide updates on our financial outlook.

Ken: In Q4, we delivered total revenue of $75 9 million.

Covid proud COVID-19 products predominantly Impella Schwab contributed $41 7 million of revenue in the fourth quarter.

Ken: Which was above the high end of our guidance range.

Ken: Purchasing patterns under our contract with the U S government for slightly stronger than expected during the quarter.

Ken: Core revenue, which excludes COVID-19 products was $34 2 million in the fourth quarter, representing 0.4% year over year growth.

Ken: Within core revenue, our diagnostic products generated $17 $2 million.

Kerry Eglinton-Manner: Turning to our innovation roadmap, we continue to make progress on our initiatives to accelerate profitable growth through organic and inorganic investment. At the beginning of this year, we announced our strategic relationship and investment in Sapro. As a part of this partnership, OTI gains exclusive commercial and distribution rights for key product lines in Safra's development pipeline that are expected to strengthen our portfolio, such as blood collection devices and new diagnostic tests.

Ken: <unk> revenue in Q4 and grew 19% year over year.

Ken: This growth was driven by HIV test sales in the U S and international markets.

Ken: Okay.

Ken: Looking at molecular sample management solutions fourth quarter revenue of $13 million increased 9% on a year over year basis, which was in line with our expectations.

Core revenue growth for diagnostics and molecular sample management solutions in the fourth quarter was offset by year over year declines in non product revenue and molecular services revenue.

Ken: As a reminder, non product revenue is primarily related to funded R&D projects grants and royalties, which are lumpy and not key growth drivers within our long term strategy.

Ken: From a gross margin perspective, our GAAP gross margin in the fourth quarter was 46, 3% compared to 45% in last year's fourth quarter.

Ken McGrath: We also see opportunities for co-funding and co-development of additional innovative offerings as our partnership progresses. Overall, the partnership is off to a great start, and our teams are working really well together in multiple areas, including R&D collaboration and in preparation for the future launch of Saffirose's initial self-collected small-volume blood product, timing, of course, subject to regulatory review. As we discussed in January, from a financial standpoint, we expect distribution of Saffros' products to add at least two percentage points to revenue growth in our core business beginning in 2025. Sales of Safros's products are expected to be accretive to OraSure's operating profit beginning in 2026 due to our ability to leverage our existing infrastructure, capabilities, and customer relationships. We anticipate a modest amount of incremental SG&A expense in 2024 and 2025 to successfully launch new Safros products in the market. And we believe our investment in Saffros is an efficient method to deploy capital, preserving flexibility for additional organic and inorganic innovation. With that, I'd like to turn the call over to Ken to discuss our financial results and guidance. Thanks, Kerry.

Ken: non-GAAP gross margin was 49, 7% compared to 49% in the prior year period.

Ken: non-GAAP gross margin expansion in Q4 was driven by production efficiencies and cost reduction initiatives.

Ken: For the full year of 2023, our GAAP gross margin of 42, 3% increased by 400 basis points compared to 2022.

Ken: And our non-GAAP gross margin of 45, 5% expanded by 540 basis points versus the prior year.

Ken: Overall, we believe we can drive additional gross margin expansion over the coming years, and we remain focused on delivering efficiencies across our enterprise, including consolidated facilities draw.

Five and procurement savings.

Ken: Further leveraging our automation capabilities and streamlining our product portfolio.

Ken: Shifting to operating expenses.

Ken: Our total operating expenses in the quarter to $31 2 million, which includes $3 3 million for impairment of acquired intangible assets and certain manufacturing equipment and 3 million of noncash stock compensation expense.

Ken: As we move into 2004, we continue to focus on driving additional savings in our non production expenses.

Ken: These incremental cost reductions are important as we look to utilize our cash to invest in growth and achieve our goal of operating cash flow breakeven and our core business by the end of 2024.

Ken: GAAP operating income was $3 9 million in the fourth quarter. The non-GAAP operating income was $13 6 million.

Ken: We ended the quarter with zero debt and total cash cash equivalents and short term investments of $290 million, which is $65 million increase.

Ken: From the prior quarter.

Ken: The increase in our cash balance during the fourth quarter was primarily driven by $41 million of operating cash flow.

Ken: We also collected $24 million in Q4 related to the achievement of capacity expansion milestones at our <unk> facility.

Ken McGrath: I'm happy to discuss our results for the fourth quarter of 2023 and provide updates on our financial outlook. In Q4, we delivered total revenue of $75.9 million. COVID-19 products, predominantly in telescopes, contributed $41.7 million of revenue in the fourth quarter, which was above the high end of our guidance. Purchasing patterns under our contract with the U.S. government were slightly stronger than expected during www.oraSure.com core revenue, which excludes COVID-19 products, with $34.2 million in the fourth quarter, representing 0.4% year over year. Within core revenue, our diagnostic products generated $17.2 million of revenue in Q4 and grew 19% year-over-year. This growth was driven by HIV test cells in the U.S. and international market. Looking at Molecular Sample Management Solutions

Speaker Change: Turning to guidance.

Speaker Change: We are guiding to the first quarter revenue of 50% to $54 million, which includes core revenue of 29% to $31 million.

Speaker Change: As Cary discussed we expect core revenue growth to improve as we move through 2024 and we remain.

Speaker Change: We're confident in our ability to elevate core growth in the coming years.

Speaker Change: For Entellus Swab, we expect revenue of 21% to $23 million in Q1.

Speaker Change: And approximately $40 million in the total in total in the first half of the year as we complete the remaining portion of our largest contract with the U S government.

Speaker Change: With that I'll turn the call back to Kerry to conclude thanks.

Kerry: Thanks, Ken.

Kerry: Over the past year OTI delivered meaningful progress on our strategic imperatives.

Kerry: We have strengthened our foundation, including strong cash flow generation improved operating efficiency and instilling an enterprise wide focus on continuous improvement to fuel how we serve customers and grow we completed the milestones included in our contract with the U S government related.

Kerry: <unk> to our capacity expansion at our Opus way facility earlier than expected and we made progress in streamlining our operational footprint in order to leverage the automation and infrastructure at our new facility.

Kerry: We grew core revenue by 2% in 2023, while navigating macro and industry headwinds.

Kerry: We expanded the portfolio of products that our sales team can provide to our customers in several important segments, including entering the U S syphilis testing market with diagnostics direct here in 2024.

Ken McGrath: Fourth quarter revenue of $13 million increased 9% on a year-over-year basis, which was in line with our expectations. However, core revenue growth from diagnostics and molecular sample management solutions in the fourth quarter was offset by year-over-year declines in non-product revenue and molecular services revenue. As a reminder, non-product revenue is primarily related to funded R&D projects, grants, and royalties, which are lumpy and not key growth drivers within our long-term strategy from a gross margin perspective. Our gap gross margin in the fourth quarter was 46.3% compared to 40.5% in last year's fourth quarter; non-gap gross margin was 49.7% compared to 40.9% in the prior year period.

Kerry: And in early January January we announced our strategic partnership and investment in <unk>.

Kerry: Which is expected to expand and accelerate our product and innovation pipeline.

Kerry: We expect our partnership with SAP Roes will accelerate our core revenue growth beginning in 2025.

Kerry: Overall OTI continues to execute in order to deliver on our vision of transforming health care actionable insight power.

Kerry: Powering the shift that connects people to health care wherever they are.

Kerry: Mission to improve access quality and value of health care with innovation and effortless past sample management solutions and services.

Kerry: Is aligned with where healthcare is headed in the coming years.

Speaker Change: With that I'm pleased to turn the call over to the operator for Q&A.

Speaker Change: Steven.

Operator: 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 on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

Operator: Please standby, while we compile the Q&A roster.

Ken McGrath: Non-Gap Gross Margin Expansion in Q4 was driven by production efficiencies and cost reduction initiatives. For the full year 2023, our GAAP gross margin of 42.3 percent increased by 400 basis points compared to 2022, and our non-gap gross margin of 45.5% expanded by 540 basis points versus the prior year. Overall, we believe we can drive additional gross margin expansion over the coming year. And we remain focused on delivering efficiencies across our enterprise, including consolidating facilities, driving procurement savings, further leveraging our automation capabilities, and streamlining our product portfolio. Shifting to operating. Our total operating expenses for the quarter were $31.2 million, which included $3.3 million for impairment of acquired intangible assets and certain manufacturing equipment and $3 million of non-cash stock compensation.

And our first question comes from the line of Patrick Donnelly with Citi. Please go ahead.

Patrick Donnelly: Hey, guys, taking the question Hey, how are you.

Patrick Donnelly: I guess when we look at the 2024 kind of Opex piece can you just talk about it seems like a little bit of a ramp. There you guys are still talking about being cash flow breakeven how does the partnership piece impact that just in terms of the opex side and again the cash flow breakeven.

Speaker Change: Love to talk to the impact there.

Speaker Change: Yes, Patrick and thank you for the question.

Speaker Change: During the during the year 2024, we do expect some quarterly fluctuations throughout opex.

Speaker Change: Given legal expenses R&D funding and the implications timing of our cost savings when it comes to some of those partnerships one of the key strengths of those partnerships is allowing us to leverage our existing infrastructure, which minimizes the investments we need directly to support them.

Speaker Change: So thats the area when we during the last quarter, we talked a little bit about it where when you look at some of these partnerships while the gross margins may be lower than our overall gross margins. The operating income is higher because what we do is we leverage all of that infrastructure again, not having to add a lot of extra resources to support.

Speaker Change: Okay. That's helpful and I guess staying on the partnership I think you talked about the potential for it to add a couple of percent to 25% revenue growth is that just kind of on that self collected blood product are there other products that should be launched in and again I guess on the shelf collected.

Ken McGrath: As we move into 2024, we continue to focus on driving additional savings in our non-production. These incremental cost reductions are important as we look to utilize our cash to invest in growth and achieve our goal of operating cash flow breakeven in our core business by the end of 2025. GAAP operating income was $3.9 million in the fourth quarter, and non-GAAP operating income was $13.6 million.

Speaker Change: Maybe just an update just on the timelines there.

Speaker Change: The approval process would be would be helpful.

Speaker Change: Yes.

Speaker Change: And you call this out and Youre right on that.

Speaker Change: <unk> approvals that kind of dictate the timing of that safra self collected small volume blood offering, which which is why we're really planning for.

Speaker Change: The ramp up this year and the revenue the incremental revenue for 2025 to answer the other part of your question about what else is included that we are looking toward.

Ken McGrath: We ended the quarter with zero debt and total cash, cash equivalents, and short-term investments of $290 million, which is a $65 million increase from the prior quarter. The increase in our cash balance during the fourth quarter was primarily driven by $41 million of operating cash. We also collected $24 million in Q4 related to the achievement of capacity expansion milestones at our Opus Way facility. Turning to guidance, we are guiding to first quarter revenue of $50 to $54 million, which includes core revenue of $29 to $31 million. As Kerry discussed, we expect core revenue growth to improve as we move through 2024, and we remain confident in our ability to accelerate core growth in the coming year. For IntelliSwap, we expect revenue of $21 to $23 million in Q1, and approximately $40 million in total in the first half of the year as we complete the remaining portion of our largest contract with the U.S. With that, I'll turn the call back to Kerry to conclude.

Speaker Change: The potential too.

Speaker Change: Launch.

Speaker Change: Other diagnostic tests and while they and we haven't talked about specifically what those are.

Speaker Change: I would say that.

Speaker Change: It's a plan that contemplates the launch of the blood test this year with some line of sight into launch of additional diagnostic test next year.

Speaker Change: And did I is there a part of that that I still need to address I think Patrick yes.

Patrick Donnelly: That covers it and one last quick one just on the Covid piece.

Speaker Change: You talked a little bit about the government contract just the cadence of Covid Rems. After a nice number this quarter and then.

Speaker Change: Just update on how you're thinking about the endemic run rate would be it would be really appreciate it. Thank you guys.

Speaker Change: Yes, right now we have visibility as you recall as you mentioned to about $40 million from the main contract most of that will be in the first half.

Speaker Change: After that we will enter the endemic phase I believe what we guided last quarter for the full year was $40 million to $45 million in total <unk> revenue.

Speaker Change: So you can infer from that the a couple of million going forward beyond that from that first contract yeah, and I'd, just say add a little color to de minimis volumes outside of the government contracts and we definitely compete in every.

Speaker Change: State local level as well we have a few of the kind of a regional grocery chains and otherwise that we've talked about in the past, but it really in comparison small small dollars verse.

Kerry Eglinton-Manner: Over the past year, OTI delivered meaningful progress on our strategic imperative. We've strengthened our foundation, including strong cash flow generation, improved operating efficiency, and instilling an enterprise-wide focus on continuous improvement to fuel how we serve customers and grow. We completed the milestones included in our contract with the U.S. government related to our capacity expansion at our Opus Way facility earlier than expected, and we made progress in streamlining our operational footprint in order to leverage the automation and infrastructure at our new facility. We grew core revenue by 2% in 2023 while navigating macro and industry headwinds.

Speaker Change: As of the time the contracts, which is again why Ken said it we've guided to that 40 to $40 million to $45 million range. So we just describe it as a small volume.

Speaker Change: Great. Thank you guys.

Speaker Change: Thanks, Patrick.

Speaker Change: Thank you.

Speaker Change: For next question.

Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: Alright. Our next question comes from the line of Jacob Johnson of Stephens. Please go ahead.

Jacob Johnson: Hey, guys. Good evening, Hi, Gary Hi, Ken Good evening.

Jacob Johnson: Maybe just starting on the <unk> guidance.

Jacob Johnson: It implies the base business is going to be down somewhere in the teens.

Jacob Johnson: <unk> carry you talked about kind of growth in the back half and you mentioned a number of opportunities, but also cited the macro I'm just curious kind of as we think about that returning to growth in the back half of the year how much of that is within your control or how much visibility do you have in that return to growth.

Kerry Eglinton-Manner: We expanded the portfolio of products that our sales team can provide to our customers in several important segments, including entering the U.S. syphilis testing market with Diagnostics Direct here in 2024. And in early January, we announced our strategic partnership and investment in Sapros, which is expected to expand and accelerate our product and innovation pipeline. We expect our partnership with Saffros will accelerate our core revenue growth beginning in 2025. Overall, OTI continues to execute in order to deliver on our vision of transforming health through actionable insights, powering the shift that connects people to health care wherever they are. Our mission, to improve access, quality, and value of healthcare with innovation in effortless tests, sample management solutions, and services, is aligned with where healthcare is headed in the coming years. With that, I'm pleased to turn the call over to the operator for Q&A. Stephen.

Speaker Change: Yes, so I'll start Jacob with some of our.

Speaker Change: Some of the visibility and kind of the path that we see.

Speaker Change: In the second half that includes what I talked about in the press.

Speaker Change: Prepared remarks, which is the distribution agreements for 2024.

Speaker Change: We're very excited about diagnostics direct and entering the U S. A syphilis testing market. That's an AD that comes in with our public health infectious disease portfolio and you know really nice momentum that we have and in HIV for example.

Speaker Change: And we have a number of other partnerships as well includes international diagnostic tests, we talked about last year that we have a partner in international Syphilis. For example, Hep C and Hep B. We also have three other partnerships and substance abuse testing it includes.

Speaker Change: One of our recently announced partnerships with soft swab Tech I won't list them, all but I would say those distribution agreements and the ramp up in 'twenty four we've talked about <unk> for 25, but I'd point to some of these other.

Operator: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.

Speaker Change: Opportunities in <unk>.

Speaker Change: In 'twenty four.

Speaker Change: As one element another and I wont list all of these but another that I would just highlight for you here is the diversification of our customer base, we've been talking about that along the way we've shared highlights of that and it's both new customers as well as.

Patrick Donnelly: Please stand by while we compile the Q&A roster. And our first question comes from the line of Patrick Donnelly of Citi. Please go ahead. Hey guys, thanks for taking the question. Hey, how are you?

Speaker Change: New agreements with sort of valued key customers that we've been working with and just the outlook. We have on their ordering patterns for for total year again, I just sort of reiterate this we see this a path in the past really isn't a strength in the in the <unk>.

Ken McGrath: I guess when we look at, you know, the 2024 kind of OPEX piece, can you just talk about, you know, it seems like a little bit of a ramp there, you guys are still talking about being cash flow breakeven. How does the partnership piece impact that, you know, just in terms of the OPEX side, and again, the cash flow breakeven? I just would love to talk about the impact there. Yeah, Patrick, and thank you for the question.

Speaker Change: Half.

Speaker Change: Got it thanks for that Gary.

Speaker Change: And it leads to my next question.

Speaker Change: You mentioned a variety of these kind of.

Speaker Change: Distribution type agreements.

Speaker Change: You've been clear that kind of partnerships are key to your strategy, especially as it relates to capital allocation, but I feel like on this call Rick we've talked a little bit more about distribution agreements can you just kind of discuss the strategy. There. It sounds like it's kind of leveraging your existing infrastructure, but I'm just kind of curious your thought process about doing more of these distribution type deals.

Kerry Eglinton-Manner: During the year 2024, we do expect some quarterly fluctuations throughout OPEX, you know, given legal expenses, R&D funding, and the implementation time of our cost savings. When it comes to some of those partnerships, one of the key strengths of those partnerships is allowing us to leverage our existing infrastructure, which minimizes the investments we need directly to support. So, that's an area where, and we talked about this during the last quarter, where when you look at some of these partnerships, while the gross margins may be lower than our overall gross margins, the operating income is higher because what we do is we leverage all of that infrastructure, again Okay, that's helpful. And I guess staying on the partnership, I think you talked about the potential for it to add a couple percent to 25% revenue growth. Is that just kind of on that self-collected blood product?

Rick: Yeah, you're exactly right and you know we've been talking about this for at least 18 months as long as I've been here you know part of what we.

Speaker Change: We have as a company that turned in the face of Covid to serve the pandemic.

Speaker Change: Was both on the sample collection side, where a huge number of that effort went to Covid collection for molecular tests and then obviously on the diagnostic side and then tell us what and what that did and I think we were transparent about it we tried to be transparent about it was that it took an innovation pipeline and really for.

Speaker Change: Because it around a key public health need.

Speaker Change: And that's why we started talking about about partnerships. It was so that we can both invest internally in the areas of our development strengths, but also put more of those complementary portfolios very quickly into our sales teams.

Speaker Change: <unk>, so that we could better serve the market with while we were simultaneously strengthening our financial foundation that that opportunity to better serve while we're completely leveraging the capabilities of very strong sales channel really strong customer.

Kerry Eglinton-Manner: Are there other products that should be launched? And again, I guess on the self-collected one, maybe just an update on the timelines there, the approval process would be would be, "Yep." And you call this out, and you're right on that it's regulatory approvals that kind of dictate the timing of that Safra self-collected small volume blood offering, which is why we're really planning for the ramp up this year and the revenue, the incremental revenue for 2025. To answer the other part of your question about what else is included that we are looking toward, the potential to launch other diagnostic tests. And while, you know, they and we haven't talked about, you know, specifically what those are, I would say that, you know, it's a plan that contemplates the launch of the blood tests this year with some line of sight into the launch of additional diagnostic tests next. And did I, is there a part of that that I still need to address, Patrick? Yeah, nope, nope, I think that covers it. And one last quick one just on the COVID piece.

Speaker Change: Asian ships, and just a credibility and a longevity of having served in this space, whether it be public health clinical or on the millennials sample collection side, our extensive diagnostic pharma biotech customers and our expansion into areas like animal health and <unk>.

Speaker Change: Byron mental research and beyond so I'd say, we did it because we needed to we knew we needed to and we leveraged our strengths to really put together some great agreements with great partners and we're going to leverage.

Speaker Change: All of that's good about our capabilities and strengths to.

Speaker Change: Change the acceleration on that success.

Speaker Change: Got it that's helpful. Gary Thanks for taking the questions that I'll leave it there.

Gary: Great. Thanks Jacob.

Speaker Change: Q1 moment for our next question.

Speaker Change: Next question comes from the line.

Speaker Change: Brandon Couillard of Jefferies. Please go ahead.

Speaker Change: Hey, Thanks. This is Matt on for Brandon, maybe one for Ken I think prior you talked about gross margins in the mid <unk> for 2024, it sounds like and tell us what assumptions haven't changed much for maybe some of these newer partnerships are lower gross margin, but operating margin is mid 40 is still the right range as we think about.

Kerry Eglinton-Manner: You talked a little bit about the government contract, just the cadence of COVID revs after, you know, a nice number this quarter. And then, you know, just the update on how you're thinking about the endemic run rate would be really appreciated. Thank you. Yeah, right now we have visibility, as you mentioned, to about $40 million from the main contract. Most of that will be in the first half.

Speaker Change: Gross margins for full year 'twenty for you.

Speaker Change: Yes, as you mentioned, we've guided towards mid <unk> last call, we're maintaining that outlook for the full year.

Speaker Change: Recognize that within the core between quarters, there may be some fluctuations based on how we ramp up cost savings. The <unk> volume as you mentioned and overall product mix. So there could be fluctuation quarter to quarter, but for the whole year, we're still maintaining mid forties.

Speaker Change: Okay. Thanks, and then on the cost savings here it sounds like you exceed the $15 million in 'twenty, three and maybe unlock some additional productivity enhancements beyond that.

Ken McGrath: After that, we will enter the endemic phase. I believe what we guided last quarter for the full year was $40 to $45 million in total IntelliSwap revenue. So you can infer from that the couple million going forward beyond that from that first contract. Yeah, and I just say to add a little color to it the minimum volumes outside of the government contracts. And we definitely compete in every state and at the local level as well.

Speaker Change: Is that the right way to think about it and then maybe talk about some of the impact and timing of some of the other areas you called out like semiconductors consolidation among other things.

Speaker Change: Yes, yes, and Youll see those impacts are.

Speaker Change: <unk> implemented throughout the year.

Speaker Change: You nailed it right one of the big areas as consolidation the other is automation.

Speaker Change: Leveraging our existing processes.

Speaker Change: And as we as we highlighted we have identified a list of those projects and are implementing those projects now throughout the year and maintaining our target of by exiting 2020 for our core business cash flow from operations will be breakeven.

Kerry Eglinton-Manner: We have a few of the kind of regional grocery chains and others that we've talked about in the past. But really, in comparison, small dollars versus the contracts, which is, again, why Ken said that we've guided to that $40 to $45 million range. So we just describe them as small volumes.

Speaker Change: Yeah.

Speaker Change: Super Thank you.

Speaker Change: Thanks, Matt.

Speaker Change: Alright. Thank you for your question one moment for the next one.

Speaker Change: Okay.

Speaker Change: Next question comes from the line of Andrew Cooper Raymond James Your line is now open.

Andrew Cooper: Hey, everybody thanks for the questions.

Andrew Cooper: Let me just first kind of a high level. One I think you talked about it a little bit already but just.

Patrick Donnelly: Great, thank you guys. Thanks, Patrick. Thank you. One moment for our next question. Alright, our next question comes from the line of Jacob Johnson of Stevens. Please go ahead. Hey, good evening. Hey, Carrie.

Andrew Cooper: Adding a lot of products for distribution, which I think makes sense given the.

Andrew Cooper: The business that you have and the capabilities to just give you but just.

Andrew Cooper: How do you think about that view on <unk>.

Andrew Cooper: Trending more towards the distribution business versus wanting to have more proprietary offerings.

Jacob Johnson: Hey, Ken. Good evening. Maybe just starting on the one cue guidance.

Andrew Cooper: And then how do you think about the opportunities I think with at least some of these to maybe bring them in house down the road what are some of the puts and takes as you contemplate them and what could the margin increase look like.

Operator: You know, it implies the base business is going to be down somewhere in the teens, in one cue, but Kerry, you talked about kind of growth in the back half, and you mentioned a number of opportunities but also cited the macro. I'm just curious, kind of as we think about that return to growth in the back half of the year, how much of that is within your control, or how much visibility do you have in that return to growth? Thank you. One moment for our next question, from Brandon Couillard of Jeffries. Please go ahead.

Andrew Cooper: That actually occur for some of these distributed products today.

Speaker Change: Yeah, Thanks, Andrew I'll leave margin to that and then and we'll address that at the end I'll just say philosophically, we really like the partnership model that allows us to leverage our strengths and access innovation now with these are these are.

Andrew Cooper: We're a fairly small company and these are pretty small partners and we have spent a lot of time, while rebuilding our financial base by which to do this to have the opportunity to be very thoughtful and judicious about what we pick and we're picking.

Andrew Cooper: Products and partnerships that really fit in our portfolio and you'll see sort of bi partner, where we choose to be exclusive and we think that that makes sense and where some <unk>.

Brandon Couillard: Thanks, this is Matt on for Brendan, maybe one for Ken. I think previously you talked about gross margins in the mid 40s for 2024. Sounds like Intelliswap's assumptions haven't changed much. Maybe some of these newer partnerships are lower gross margin, but better operating margin. Is the mid-40s still the right range as we think about gross margins for full year 24 year? So there could be fluctuation quarter to quarter, but for the whole year, we're still maintaining the mid-40s.

Andrew Cooper: We've made a strategic investments like we did in <unk>, because there are sort of more elements to that strategic agreements and we have the potential to co fund.

Andrew Cooper: Co develop what I would say by giving me. Those examples is this is a part of a.

Andrew Cooper: Big picture strategy that we've been very thoughtful about and aligns with our multiyear.

Andrew Cooper: Innovation Road map that we put together and landscapes and went out looking for these pieces.

Andrew Cooper: But I would just describe it as very thoughtfully come into our portfolio because we truly believe we have an opportunity to accelerate them. You'll also see that that mix is across portfolios and sales teams. So we are intentional about what we're adding to diagnostics, both domestically and interim <unk>.

Ken McGrath: Thanks, Matt. Yeah, thanks, Andrew. I'll leave a margin at the end.

Kerry Eglinton-Manner: And, you know, we'll address that at the end. But, philosophically, you know, we really like the partnership model that allows us to leverage our strengths and access innovation now. With these, you know, these are, we're a fairly small company, and these are pretty small partners.

Andrew Cooper: Nationally the amount you hear about syphilis U S testing.

Andrew Cooper: Probably not a big surprise, but really great news, but not a big surprise to see us entering that market.

Andrew Cooper: So whether it's the diagnostics.

Andrew Cooper: Play, we're picking or the team that we're putting it into the substance abuse partnerships. For example are a very different sales team that are our core diagnostic sales team.

Kerry Eglinton-Manner: And we have spent a lot of time, while rebuilding our financial base by which to do this, having the opportunity to be very thoughtful and judicious about what we pick. And we're picking products and partnerships that really fit in our portfolio. And you'll see, you know, sort of by partner, where we choose to be exclusive. And we think that that makes sense.

Andrew Cooper: So just to bring it all together I would say, it's a part of our a well defined strategy. We've been communicating we've been forecasting that this was.

Andrew Cooper: An important part of our growth plan and we're excited to share more about each of these along the way.

Andrew Cooper: To deliver as proof points the growth the elevating our core core growth in doing that just like we've been talking about in terms of margin.

Andrew Cooper: Ken maybe to cut back.

Andrew Cooper: And to build on and add also to a carrier said, we're exploring all types of growth, particularly when it comes to our strategy both organic inorganic all different deal types to Terry's point really fit with our strategy.

Kerry Eglinton-Manner: And where some, you know, we've made a strategic investment, like we did in Saffros, because, you know, there are sort of more elements to that strategic agreement, and we have the potential to co-fund and co-develop. What I would say by giving you those examples is this is a part of a big picture strategy that we've been very thoughtful about and aligns with our multi-year innovation roadmap that we put together and landscaped and went out looking for these pieces that I would just describe as very thoughtfully coming into our portfolio because we truly believe we have an opportunity to accelerate them. You'll also see that that mix is across portfolios and sales teams. So we're intentional about what we're adding to diagnostics, both domestically and internationally. I mean, the amount you hear about syphilis US testing, probably not a big surprise but, you know, really great news, but not a big surprise to see us entering that market. You know, whether it's the diagnostics, super, super helpful.

Andrew Cooper: The luxury right now and it would be.

Andrew Cooper: Pretty strong financial position.

Andrew Cooper: To really look and choose the ones that are the best fit.

Andrew Cooper: When it comes to margins when you think about distribution, specifically again think of it as P&L geography, the gross margins, maybe a little bit lower than our overall gross margins, but because we leveraged significantly kind of the opex to existing opex infrastructure, there's not a lot of incremental cost on that and so when you go to the bottom line, it's actually incremental.

Speaker Change: Accretive to our overall operating income margins and I know I'm, making up a long answer Andrew but I'm going to add this.

Andrew Cooper: We think it's important to have multiple shots on goal, we use that phrase and we talk about it.

Andrew Cooper: We are very much open to M&A.

Andrew Cooper: Again, just as the size of company. We are we think we will continue to be super judicious about that.

Andrew Cooper: Many of our agreements are exclusive many are multiyear.

Andrew Cooper: We put a lot of effort into how we make those durable on partnerships that can really pay off.

Andrew Cooper: But we have opportunities to do more and our our modeling doesn't require that every single one of these.

Kerry Eglinton-Manner: B the blockbuster, we're sure going to put the effort into that which is why we've diversified across teams and our strategy, but a part of this is ensuring that we make smart selections and really leverage our strengths and I think I'd just say to you we're really clear on what those strengths are.

Speaker Change: Super Super helpful.

Andrew Cooper: Maybe just one more from me. Just when we think about that core growth improving through the year and the commentary about, you know, the partnership starting to contribute more through that year, just to kind of level set, what, what sort of growth expectations do you have for, let's call it the historical core, the business that, you know, we've known for some time? What is the outlook as we think about kind of that traditional product suite relative to what's being contributed from the partnership? Yeah, well, we don't provide product-specific guidance. We are looking for growth across all aspects of the portfolio. But just from the distribution agreements, obviously, that'll add incremental growth. But we are looking for growth in all avenues, depending on the particular opportunities that present themselves in the market conditions.

Speaker Change: Maybe just one one more for me.

Speaker Change: Just when we think about that core growth improving through the year and the commentary about the partnerships starting to contribute more.

Speaker Change: Through that year, just to kind of level set what what sort of growth expectations do you have for let's call. It the historical core the business that we've known for some time.

Speaker Change: What is the outlook as we think about kind of that traditional.

Speaker Change: Product suite relative to what's being contributed from the partnerships.

Speaker Change: Yes, while we don't provide product specific guidance, we are looking for growth across all aspects of the portfolio.

Ken McGrath: But just from the distribution agreements, obviously that will add incremental growth, but we are looking for growth in all avenues, depending on the particular opportunities that present themselves in the market conditions.

Ken McGrath: Okay, great. I will stop there. Thank you. Thank you for your questions. This does conclude the question and answer session. I would now like to turn it back to Carrie for closing remarks. Great. Thank you so much for everyone's participation, and we thank you for your continued interest in OraSure. Have a great night. Thank you, Stephen. Bye-bye. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. www.oraSure.com

Speaker Change: Okay great.

Brandon Couillard: Stop there thank you.

Carrie: Great. Thanks, Andrew.

Carrie: <unk> for your questions. This does conclude the question and answer session.

Carrie: I'd now like to turn it back to Gary for closing remarks.

Carrie: Great. Thank you so much for everyone's participation and we thank you for your continued interest in orange or have a great night. Thank you Steven.

Ken McGrath: Alright, great. Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

Ken McGrath: Okay.

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