Q1 2024 OraSure Technologies Inc Earnings Call
Good day and thank you for standby welcome to the Orasure technologies first quarter 2024 earnings conference call. At this time, all participants are in a listen only mode.
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Please be advised that today's conference is being recorded.
I would now like to turn the conference over to your Speaker today, Jason Blackman, Vice President of Investor Relations. Please go ahead.
Jason Plagman: Good afternoon, and welcome to Orasure Technologies' first quarter 2024 earnings call participating in our call today for OTI or Carrie Eglinton manner, our president and Chief Executive Officer, and Kevin 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.
Jason Plagman: 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 product development performance shipments and market business plans regulatory filings and approvals.
Jason Plagman: Patients and strategies actual results could be significantly different.
Jason Plagman: Factors that could affect results are more.
Are discussed more fully in <unk> SEC filings, including its registration statements.
Jason Plagman: Annual report on Form 10-K for the year ended December 31st 2023 quarterly report on Form 10-K, Q and its other SEC filings. Although forward looking statements help to provide more 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.
Jason Plagman: OTI undertakes no obligation to update any forward looking statements to reflect events or circumstances. After this call.
Jason Plagman: I am pleased to turn the call over to Kerry.
Kerry: Thanks, Jason and thank you to everyone for joining us today.
Kerry: We're pleased to provide an update on the progress of our assurance, making on the three pillars of our strategic transformation.
Kerry: And before I talk about the quarter I, just want to frame, what strengthening our foundation elevating our core growth and accelerating profitable growth look like in our business.
Kerry: <unk> is our organizational restructuring and cost rebalancing that has improved our balance sheet and cash flow generation.
Kerry: Elevating is a focus on our core capabilities and leveraging these strengths internally and then strategic partnership.
Kerry: To expand our product portfolio and the market segments, we serve.
Kerry: Accelerating its about investing for profitable mid and long term growth, while our in segments rebuild momentum.
Kerry: A few notable highlights during the first quarter included we Didnt, we delivered Q1 revenue that exceeded our guidance ranges for both core revenue and COVID-19 products as part of strengthening our foundation and our enterprise wide focus on operational efficiency. We are taking next steps.
Kerry: The minor operations, including in sourcing third party manufacturing activities into our Bethlehem facility.
Kerry: Our microbiome laboratory and analytical analytical sequencing services those are known as diverse region.
Kerry: And consolidating our novus on a site in Belgium, and the other locations.
Kerry: These initiatives are expected to result in significant cost savings over the next two years and are important steps to align around our strength.
Kerry: Right size, our cost structure and achieve our targets to breakeven and operating cash flow from our core business by the end of 2024.
Kerry: Next our strategic partnerships with SAP rose and diagnostic direct that we announced earlier this year are off to a strong start.
Kerry: And with our healthy balance sheet, we are investing in our innovation roadmap and partnerships to leverage our existing strengths in order to position OTI for profitable growth.
Kerry: Starting with the operating efficiencies, we continue to strengthen our foundation as we discussed over the last 18 months, we have made tremendous progress in improving our operating efficiency.
Kerry: <unk> in our footprint and establishing an enterprise wide mindset that delivers continuous improvement.
Kerry: As part of these efforts we are taking additional steps to rebalance our cost structure and position OTI for long term success.
Kerry: First we initiated steps to wind down diverse region by the end of the third quarter.
Kerry: OTI acquired diverse agenda and core by them in 2019 based on the potential of the microbiome sequencing services market.
Kerry: Despite early success, the COVID-19, pandemic and other external market factors.
Kerry: Negatively impacted the microbiome segment, and we have experienced a decline in services revenue, while lacking in line of sight to meaningful near term growth in this segment.
Kerry: Given our limited visibility to scaling the business profitably and prioritization of our other core strength, we have decided to exit the microbiome sequencing services business.
Kerry: We are focused on providing continuity for our clients and transitioning them to a leader in the space.
Kerry: Plus it's important to note we will continue to participate in and serve the segments with our DNA genotype microbiome sample management kits and our distribution of the interim systems collection offerings.
Kerry: Second we commenced projects to ensure its production of certain sample management products from external contract manufacturers and cannot Canada into our manufacturing center of excellence in Bethlehem, Pennsylvania over the next 18 months.
Kerry: In sourcing these activities is expected to improve our operating efficiency and further leverage our existing capabilities and infrastructure.
Kerry: Third we are planning to exit are nervous on the site in Belgium by the end of this year and integrate those activities into our existing infrastructure.
Kerry: We will continue to develop and solve the call AP urine collection device as part of our sample management solutions.
Kerry: In total these actions are expected to result in more than $15 million incremental annual expense reductions following completion and they are important steps in achieving our targets to breakeven and operating cash flow from our core business.
Kerry: End of 2024.
Kerry: Moving to COVID-19.
Kerry: And tell us swab generated $23 million of revenue in Q1 as.
Kerry: As we discussed last quarter, we have visibility to order trends that are expected to fulfill the remaining portion of our largest and tell us what contract with the U S government during Q2.
Kerry: Moving to our core business, which excludes COVID-19 related products.
Kerry: Q1 core revenue of $31 million was at the high end of our guidance range performance in both core diagnostics and core molecular sample management markets or consistent with the outlook embedded in our guidance.
Kerry: Within our diagnostics business March 2024 wrapped up the initial 12 month period. So that together take me home program that includes HIV at home test kit distribution.
Kerry: As you May remember together take me home is a collaborative effort across the private and public sector with the goal to provide free HIV test kits in all 50 states and Puerto Rico.
Kerry: Initial plans were to distribute 200000 test kits per year during the five year program for a total of $1 million has deployed.
Kerry: However, the demand for test has far exceeded expectations.
Kerry: According to data collected by their program, 27% of orders, where people who reported they had never tested for HIV before the.
Kerry: The program's success demonstrates how reducing barriers to care empowers individuals to learn about their health combat stigma and positively impact access to HIV testing prevention and care services.
Speaker Change: We're proud to play a role on this important program and look forward to a successful second year.
Speaker Change: Since our last call, we successfully launched the sales and distribution partnerships that we announced previously we delivered our first sets of orders for diagnostic direct syphilis health check test.
Speaker Change: And for Anaerobe systems by them preserve amongst others.
Speaker Change: Launches demonstrate how partnerships allow us to enter new market segments expanded the portfolio of comp comprehensive products, we can provide to our customers and leverage our existing capabilities.
Speaker Change: Shifting to molecular sample management solutions the market environment remains muted as the industry of mergers under the post Covid environment. In addition to factors such as regulatory uncertainty for diagnostic labs.
Speaker Change: Evolving research priorities and funding environments for life Sciences and academic organizations.
Speaker Change: And a few customers working through short term uncertainty related to corporate structures.
Speaker Change: Even with these near term headwinds. However, we remain confident in the mid and longer term opportunities for our sample management solutions, while we continue to reinforce our market leadership position.
Speaker Change: As our end segments begin to recover we are confident in our position as an industry leading provider of sample management solutions for a number of reasons.
Speaker Change: We continue to demonstrate the quality and consistency of our sample management solutions, including our 500 10-K cleared collection and stabilization devices.
Speaker Change: Several categories.
Speaker Change: Also we believe our track record of collaborating with our partners and successfully navigating complex regulatory approval processes will become even more important for diagnostic labs as they contemplate FDA regulation of <unk>.
Speaker Change: And we.
Speaker Change: We have developed very strong customer relationships as a result of our consistent execution reliability and our experienced sales team.
Speaker Change: We continue to reinforce our leadership position by Onboarding, new customers as well across multiple segments, including clinical reference labs Biopharma companies Global research as well as non humans guidelines.
Speaker Change: While the orders from these customers represent a small percentage of our revenue today.
Speaker Change: They represent future growth opportunities as our offerings scale and their discovery work progresses.
Speaker Change: In addition to Onboarding new customers, we are proud to have long standing relationships with the pioneers and innovators in the genetic testing space.
Speaker Change: On this note we are pleased to share that we've recently signed a multiyear deal with 23 and me to continue to provide our five 10-K FDA cleared origin collection device to be used in their health and ancestry services.
Speaker Change: 23, and me provides individuals with genetic insights.
Speaker Change: <unk> tools to empower them to take action on their health.
Speaker Change: From an innovation standpoint, we continue to make investments in our product pipeline and evaluate potential investments that can accelerate our growth.
Speaker Change: This includes both internal and inorganic opportunities through strategic partnerships and potential acquisitions.
Speaker Change: Our strong balance sheet and positive cash flow generation continue to be important differentiators in the current market and economic environment as we look for opportunities to accelerate our growth and profitably scale our business.
Speaker Change: Before I conclude I'd like to highlight that we recently published our 2023 to 2024 or assure cares ESG report on our Investor Relations website.
Speaker Change: This report highlights our progress in advancing sustainability and governance related initiatives that are meaningful to our internal and external stakeholders.
Speaker Change: And our efforts to create value for our customers employees shareholders and the global communities that we serve.
Speaker Change: With that I'd like to turn our call over to Ken to discuss our financial results and guidance.
Ken: Okay. Thanks.
Ken: I'm happy to discuss our results for the first quarter of 2024 and provide updates on our financial outlook.
Ken: In Q1.
Ken: Total revenue of $54 1 million core revenue, which excludes COVID-19 products was $31 million in the first quarter.
Ken: Within core revenue, our diagnostic products generated $16 $4 million of revenue in Q1 and decreased 4% year over year.
Ken: Looking at molecular sample management solutions revenue in the first quarter of $10 8 million decreased 16% on a year over year basis, which was consistent with the expectations embedded in our guidance range.
Ken: COVID-19 products predominantly in Tulsa contributed $23 $1 million of revenue in the first quarter.
Ken: Purchasing patterns under our contract with the U S government were slightly stronger than forecasted.
Ken: We expect to fulfill the remaining $17 million of our largest contract with the U S government during the second quarter.
Ken: From a gross margin perspective.
Ken: GAAP gross margin in the first quarter was 44, 5%.
Ken: non-GAAP gross margin was 45, 2% in the quarter, which was consistent with our expectations.
Ken: While we anticipate some quarterly fluctuations in gross margin percentage. During 2024. The latest is the timing of the restructuring initiatives. We have discussed in the paper and tell us what volumes. We continue to believe we can drive additional gross margin expansion over the coming years.
Ken: And we remain focused on delivering efficiencies across our enterprise, including <unk>.
Ken: Consolidating facilities driving procurement savings and further leveraging our automation capabilities.
Ken: Shifting to our operating expenses.
Ken: Our GAAP operating expenses in the quarter was $31 $2 million, which includes $2 8 million of noncash stock compensation expense.
Ken: $3 3 million for impairment of assets related to diverse agenda in <unk> and 173000 for a reduction in workforce.
Ken: Our GAAP operating loss in Q1 was $7 1 million and non-GAAP operating loss was 300000.
Speaker Change: As Terry discussed as part of our transformation journey.
Speaker Change: This yielded several additional actions to rebalance our cost structure.
Speaker Change: Holiday to our operational footprint and streamline our portfolio of offerings, while we focus on our strengths.
Speaker Change: To that end, we plan to wind down and exit Diversely, Jim by the end of the third quarter.
Speaker Change: This business, which comprises our molecular services offering generated $4 million of revenue over the last 12 months the decline from the prior two years.
Speaker Change: From a cost savings perspective, our exit from the microbiome sequencing services business is expected to reduce our annualized expenses by approximately $10 million.
Speaker Change: Which includes both cost of goods sold and operating expenses.
Speaker Change: In our sample management solutions business, we are in sourcing manufacturing of certain products into our Bethlehem facilities.
Speaker Change: We expect to transition production for majority of the volume by the end of 2024 with the remainder in 2020 bonds.
Speaker Change: In sourcing. These activities is expected to result in approximately $5 million of annualized cost savings upon completion of the transition.
Speaker Change: Additionally, we initiated steps to close our <unk> site in Belgium by the end of 2024 and integrate those activities into our teams in the U S and Canada.
Speaker Change: In total these three initiatives are expected to result in more than $15 million of incremental annual expense reductions following completion.
Speaker Change: As an important step in our plan to achieve our target to break even in operating cash flow from our core business by the end of 2024.
Speaker Change: These actions are in addition to our ongoing enterprise wide focus on operational efficiency and continuous improvement.
Speaker Change: Moving to our balance sheet, we ended the first quarter with zero debt and total cash cash equivalents and short term investments of $264 million.
Speaker Change: During the quarter, we generated $7 million of.
Speaker Change: Operating cash flow and we deploy $28 million for investment in suffers.
Speaker Change: Turning to guidance, we are guiding to second quarter revenue of $50 to $55 million, which includes core revenue of $33 million to $36 million and then tell us what revenue of 17% to $19 million.
Speaker Change: Our Q2 guidance includes 650000 of revenue from the molecular service business that we plan to exit.
Speaker Change: Yeah.
Speaker Change: Looking ahead to the second half of the year.
Speaker Change: We expect a slight sequential improvement in core revenue in Q3, and Q4 compared to our Q2 outlook.
Speaker Change: This year was influenced by several factors, including our expectation for de minimus revenue contributions from the Diversely, Jim Molecular services business. After the second quarter and a muted pace of recovery in genomics in other <unk> segments consistent with the current market environment.
Speaker Change: With that I'll turn the call back to Kerry to conclude.
Kerry: Thanks, Ken as we detailed today, we are taking important steps to continue to strengthen our foundation by right sizing our cost structure streamlining our operations into our centers of excellence.
Kerry: And focusing our investments in areas that leverage our existing strengths in order to accelerate our core growth in the mid to long term.
Kerry: Overall, we are confidence that OTI is well positioned to execute on our vision of transforming health through actionable insights.
Kerry: Powering the shifts that connects people to health care wherever they are.
Kerry: Our mission of improving access quality and value of health care with innovation and effortless paths and sample management solutions is aligned with where healthcare is headed in the U S and globally over the coming years.
Speaker Change: With that I'm pleased to turn the call back over to the operator for Q&A.
Speaker Change: Operator.
Speaker Change: Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Speaker Change: Please stand by while we compile the Q&A roster.
Speaker Change: Our first question comes from the line of Jordan Adler with Evercore ISI. Your line is now open.
Jordan Adler: Hi, Jordan.
Jordan Adler: Hi, Thanks for taking my question.
Jordan Adler: Maybe for the first one.
Jordan Adler: You guys have mentioned the strengthening of your balance sheet is a priority can you talk to some of the opportunities that <unk> been targeting.
Jordan Adler: Whether it be for partnerships and or inorganic opportunities.
Jordan Adler: Yes, we have announced seven partnerships Jordan that I know you're aware of but.
Jordan Adler: We're really excited about so we've talked every quarter about this journey and I love that you asked about it but starting with that strengthen the foundation.
Jordan Adler: The point really is to position us for investing in the future that's internal.
Jordan Adler: And as I just reiterated.
Jordan Adler: Strategic partnerships that we've talked about with <unk> to expand our portfolio with diagnostics direct that launches.
Jordan Adler: And it allows us to enter the U S syphilis testing market and other opportunities we have with five others I won't list them, all but opportunities like that that allow us to plug directly in our strengths today are strong commercial team the great customer relationships, we have and provide more comprehensive.
Jordan Adler: Of <unk>.
Jordan Adler: Product offerings. So we are very interested in the M&A opportunities, but we think partnerships are a really good way.
Jordan Adler: To create that momentum and build on the success that works, while being very open we're investing internally, but also being very open to other M&A that makes sense for our business.
Speaker Change: Understood and maybe one quick follow up you mentioned the restructuring initiatives.
Speaker Change: Expect it to result in a $15 million of annualized expense reductions.
Speaker Change: You also mentioned some additional.
Speaker Change: Operational efficiencies that youre looking to utilize over the course of the.
Speaker Change: Mid term to longer term can you talk about some of those additional levers left to pull.
Jordan Adler: Following.
Jordan Adler: These three actions, let me mention this quarter.
Speaker Change: Yeah, absolutely. So you know the thematic Lee Youll hear the site consolidations.
Speaker Change: In those three actions right really bringing into our centers of excellence.
Speaker Change: Some are our facilities globally and even from in sourcing third party manufacturing some of the other operating efficiency, we get in the centre of excellence are things like the automation that we need capabilities, we built during COVID-19 and our government funded opus wave.
Speaker Change: <unk> that we can translate to other platforms.
Speaker Change: We talked about the three actions site consolidation then you get those next steps like automation. Another example, and I'll just list.
Speaker Change: One because of the another big deal is like repackaging them and the redesign for smaller packaging, we had announced those significant gross margin improvement and our Intel us lob a product last year, we're making those types of changes into our HIV product line as well so it's.
Speaker Change: It's those types of operational efficiencies, we use site consolidation and then we leverage the capabilities, we've built and we extend that into the rest of our portfolio.
Speaker Change: And we said this but since we've only looks like we got two questions at a time I'll just add.
Speaker Change: We've also brought a process improvement mindset across the business implemented a lean six sigma methodology have trained.
Speaker Change: Well over 100 people in the organization as White belt and every function now has expertise and process improvements until we're really thinking about this holistically planning for the future. So that we can invest in innovation for the long term.
Speaker Change: Thanks Jordan.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Jacob Johnson with Stephens, Inc. Your line is now open.
Jacob K. Johnson: Hi, good afternoon.
Speaker Change: Hi, Gary This is Matt on for Jacob just a few quick ones from me as well.
Matt: With regards to the wind down of <unk>.
Speaker Change: Jim.
Matt: It appears this was mainly a cost decision, but can you discuss why this offering was no longer strategic and.
Matt: And impact on anything else within the broker portfolio.
Matt: Yeah.
Jim: We were excited in acquiring the versus your non core by them five years ago with the potential of microbiome.
Matt: <unk> talked about in the scripted remarks COVID-19 after a really good start and growing the revenue in the beginning cover to really put a lot of pressure.
Matt: On microbiome as an industry and we did not see that sort of path to a scaling that we think is necessary in sequencing services.
Matt: While our core strength really is in the device side on diagnostic devices and sample management collection devices. The sequencing services at the scale. We were at just meant that we were losing significant dollars and that path to build was far enough out.
Matt: That we have are just so focused in on our core strengths. What do you think it makes more sense to wind that down save the operating costs and overall expense and focus on our device strength. So what it means Mac is.
Matt: Microbiome kits, we're trying to emphasize are still very much within our sample management strategy and you know in.
Matt: The customers were all sort of in that space. So we do not think it has negative impact on other parts of the business. In fact, we think it allows us to invest in our core leverage our core strengths that includes microbiome kits, but it just means the sequencing services that require scale.
Speaker Change: We can take that savings and invested in the stronger parts of the business.
Speaker Change: I appreciate the color there.
Speaker Change: Just in light of everything.
Speaker Change: Everything all the moving pieces within the portfolio at the moment and your expectations for.
Speaker Change: Go to the end of the year, how should we think about cash flow trending.
Speaker Change: As you.
Speaker Change: Complaint the wind down those inventories and accounts receivable.
Speaker Change: Yes.
Speaker Change: Mentioned on previous calls that we think there's upside for cash flow when it comes to our accounts receivable and inventory we saw some of that in Q1.
Speaker Change: And we will continue to see more I think who will be stated in the past was we expect our inventory and accounts receivable to be in that 30 35 mid <unk> range.
Speaker Change: Ongoing basis from a cash flow perspective, and then also our goal is to debt and our target is to get to our core business being cash flow from operations breakeven.
Speaker Change: And with that we think we're in a pretty strong position from a cash wise, where we will deploy the cash if there's any opportunities to invest as Kerry mentioned, both internally and externally and opportunities for growth.
Speaker Change: Great. Thank you for taking my questions.
Speaker Change: Thank you. Thank you and I'm currently showing no further questions at this time I'd like to turn the call back over to Carrie Eglinton manner for closing remarks.
Carrie Eglinton Manner: Thank you thank you to.
Carrie Eglinton Manner: To everyone for joining us for your interest and we look forward to our follow up.
Speaker Change: With that we'll close.
Speaker Change: This concludes today's conference call. Thank you for your participation you may now disconnect.
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