OraSure Technologies, Inc. (NASDAQ:OSUR) Q1 2024 Earnings Call Transcript May 8, 2024
OraSure Technologies, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to the OraSure Technologies First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to turn the conference over to your speaker today Jason Plagman, Vice President of Investor Relations. Please go ahead.
Jason Plagman: Good afternoon, and welcome to OraSure Technologies’ first quarter 2024 earnings call. Participating in the call today for OTI are Carrie 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, expenses, profitability, earnings or loss per share and other financial performance, product development, performance, shipments in markets, business plans, regulatory filings and approvals, expectations and strategies.
Actual results could significantly differ. 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, 2023, its quarterly reports on Form 10-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. OTI 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 Carrie.
Carrie Eglinton Manner: Thanks, Jason, 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. And before I talk about the quarter, I just want to frame what’s strengthening our foundation, elevating our core growth and accelerating profitable growth look like in our business. Strengthening is our organizational restructuring and cost rebalancing that has improved our balance sheet and cash flow generation. Elevating is the focus on our core capabilities and leveraging these strengths internally and in strategic partnerships to expand our product portfolio and the market segments we serve. Accelerating is about investing for profitable mid and long-term growth, while our end segments rebuild momentum.
A few notable highlights during the first quarter include 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 to streamline our operations, including in sourcing third party manufacturing activities into our Bethlehem facilities, exiting our microbiome laboratory and analytical sequencing services business known as Diversigen, and consolidating our Novosanis site in Belgium and other locations. These initiatives are expected to result in significant cost savings over the next two years and are important steps to align around our strengths, right size, our cost structure and achieve our targets to breakeven in operating cash flow from our core business by the end of 2024.
Next, our strategic partnerships with Sapphiros and Diagnostics Direct that we announced earlier this year are off to strong start. And with our healthy balance sheet, we are investing in our innovation road map and partnerships that leverage our existing strengths in order to position OTI for profitable growth. Starting with operating efficiency, we continue to strengthen our foundation. As we’ve discussed over the last 18 months, we have made tremendous progress in improving our operating efficiency, streamlining our footprint and establishing an enterprise-wide mindset that delivers continuous improvement. As part of these efforts, we are taking additional steps to rebalance our cost structure and position OTI for long-term success. First, we initiated steps to wind down Diversigen by the end of the third quarter.
OTI acquired Diversigen and CoreBiome in 2019 based on the potential of the microbiome sequencing services market. Despite early success, the COVID-19 pandemic and other external market factors have negatively impacted the microbiome segment and we have experienced a decline in services revenue while lacking line of sight to meaningful near term growth in this segment. Given our limited visibility to scaling the business profitably and prioritization of our other core strengths, we have decided to exit the microbiome sequencing services business. We are focused on providing continuity for our clients and transitioning them to a leader in the space. Plus, it’s important to note we will continue to participate in and serve the segments with our DNA Genotek microbiome sample management kits and our distribution of Anaerobe Systems collection offerings.
Second, we commenced projects to in source production of certain sample management products from external contract manufacturers in Canada into our manufacturing center of excellence in Bethlehem, Pennsylvania over the next 18 months. Insourcing these activities is expected to improve our operating efficiency and further leverage our existing capabilities and infrastructure. Third, we are planning to exit our Novosanis site in Belgium by the end of this year and integrate those activities into our existing infrastructure. We will continue to develop and sell the Colli-Pee urine collection device as part of our Sample Management Solutions. In total, these actions are expected to result in more than $15 million of incremental annual expense reductions following completion, and they are important steps in achieving our targets to breakeven in operating cash flow from our core business by the end of 2024.
Moving to COVID-19. InteliSwab generated $23 million of revenue in Q1. As we discussed last quarter, we have visibility to order trends that are expected to fulfill the remaining portion of our largest InteliSwab contract with the U.S. government during Q2. Moving to our core business, which excludes COVID-related products. 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 were consistent with the outlook embedded in our guidance. Within our diagnostics business, March 2024 wrapped up the initial 12-month period for the Together Take Me Home program that includes HIV at home test kit distribution. 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.
Initial plans were to distribute 200,000 test kits per year during the five-year program, for a total of 1 million tests deployed. However, the demand for tests has far exceeded expectations. According to data collected by the program, 27% of orders were people who reported they had never tested for HIV before. The program’s success demonstrates how reducing barriers to care empowers individuals to learn about their health, combats stigma, and positively impacts access to HIV testing, prevention and care services. We are proud to play a role in this important program and look forward to a successful second year. Since our last call, we successfully launched the sales and distribution partnerships that we announced previously. We delivered our first sets of orders for Diagnostics Direct, Syphilis Health Check test, and for Anaerobe Systems, BIOME-Preserve, amongst others.
These launches demonstrate how partnerships allow us to enter new market segments, expand the portfolio of comprehensive products we can provide to our customers, and leverage our existing capabilities. Shifting to Molecular Sample Management Solutions, the market environment remains muted as the industry emerges into the post-COVID environment, in addition to factors such as regulatory uncertainty for diagnostic labs, evolving research priorities and funding environments for life sciences and academic organizations, and a few customers working through short-term uncertainty related to corporate structures. 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.
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. We continue to demonstrate the quality and consistency of our Sample Management Solutions, including our 510(k) cleared collection and stabilization devices in several categories. 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 LDTs, and we have developed very strong customer relationships as a result of our consistent execution, reliability and our experienced sales team. 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-human segments.
While the orders from these customers represent a small percentage of our revenue today, they represent future growth opportunities as our offering scale and their discovery work progresses. In addition to onboarding new customers, we are proud to hold longstanding relationships with the pioneers and innovators in the genetic testing space. On this note, we are pleased to share that we’ve recently signed a multiyear deal with 23andMe to continue to provide our 510(k) FDA cleared Oragene collection device to be used in their health and ancestry services. 23andMe provides individuals with genetic insights and tools to empower them to take action on their health. From an innovation standpoint, we continue to make investments in our product pipeline and evaluate potential investments that can accelerate our growth.
This includes both internal and inorganic opportunities through strategic partnerships and potential acquisitions. 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. Before I conclude, I’d like to highlight that we recently published our 2023 to 2024 OraSure Cares ESG report on our investor relations website. This report highlights our progress in advancing sustainability and governance related initiatives that are meaningful to our internal and external stakeholders and our efforts to create value for our customers, employees, shareholders and the global communities that we serve.
With that, I’d like to turn our call over to Ken to discuss our financial results and guidance.
Ken McGrath: Thanks, Carrie. I’m happy to discuss our results for the first quarter of 2024 and provide updates on our financial outlook. In Q1, we delivered total revenue of $54.1 million. Core revenue, which excludes COVID-19 products, was $31 million in the first quarter. Within core revenue, our diagnostic products generated $16.4 million of revenue in Q1 and decreased 4% year-over-year. 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. COVID-19 products, predominantly InteliSwab, contributed $23.1 million of revenue in the first quarter. Purchasing patterns under our contract with the U.S. government were slightly stronger than forecasted.
We expect to fulfill the remaining $17 million of our largest contract with the U.S. government during the second quarter. From a gross margin perspective, our GAAP gross margin in the first quarter was 44.5%. Non-GAAP gross margin was 45.2% in the quarter, which was consistent with our expectations. While we anticipate some quarterly fluctuations in gross margin percentage during 2024 related to the timing of the restructuring initiatives we’ve discussed and the tapering of InteliSwab volumes, we continue to believe we can drive additional gross margin expansion over the coming years, and we remain focused on delivering efficiencies across our enterprise, including consolidating facilities, driving procurement savings, and further leveraging our automation capabilities.
Shifting to our operating expenses. Our GAAP operating expenses in the quarter were $31.2 million, which includes $2.8 million of non-cash stock compensation expense, $3.3 million for impairment of assets related to Diversigen and Novosanis, and $173,000 [ph] for reduction in workforce severance. Our GAAP operating loss in Q1 was $7.1 million and non-GAAP operating loss was $300,000. As Carrie discussed, as part of our transformation journey, we initiated several additional actions to rebalance our cost structure, consolidate our operational footprint, and streamline our portfolio of offerings while we focus on our strengths. To that end, we plan to wind down and exit Diversigen by the end of the third quarter. This business, which comprises our molecular services offering, generated $4 million of revenue over the last 12 months, a decline from the prior two years.
From a cost savings perspective, our exit from the microbiome sequencing services business is expected to reduce our annualized expenses by approximately $10 million, which includes both cost of goods sold and operating expenses. In our Sample Management Solutions business, we are in sourcing manufacturing of certain products into our Bethlehem facilities. We expect to transition production for a majority of the volume by the end of 2024, with the remainder in 2025. Insourcing these activities is expected to result in approximately $5 million of annualized cost savings upon completion of the transition. Additionally, we initiated steps to close our Novosanis site in Belgium by the end of 2024 and integrate those activities into our teams in the U.S. and Canada.
In total, these three initiatives are expected to result in more than $15 million of incremental annual expense reductions following completion, which is 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. These actions are in addition to our ongoing enterprise wide focus on operational efficiency and continuous improvement. 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. During the quarter, we generated $7 million of operating cash flow and we deployed $28 million for our investment in Sapphiros. Turning to guidance, we are guiding to second quarter revenue of $50 million to $55 million, which includes core revenue of $33 million to $36 million and InteliSwab revenue of $17 million to $19 million.
Our Q2 guidance includes $650,000 of revenue from the molecular services business that we plan to exit. Looking ahead to the second half of the year, we expect slight sequential improvement in core revenue in Q3 and Q4 compared to our Q2 outlook. This year is influenced by several factors including our expectation for the minimis revenue contributions from the Diversigen molecular services business after the second quarter, and a muted pace of recovery in genomics and other omics segments consistent with the current market environment. With that, I’ll turn the call back to Carrie to conclude.
Carrie Eglinton Manner: Thanks, Ken. As we detailed today, we are taking important steps to continue to strengthen our foundation by rightsizing our cost structure, streamlining our operations into our centers of excellence, and focusing our investments in areas that leverage our existing strengths in order to accelerate our core growth in the mid-to-long term. Overall, we are confident that OTI is well positioned to execute on our vision of transforming health through actionable insight. Powering the shift that connects people to healthcare wherever they are and our mission of improving access, quality and value of healthcare with innovation in effortless tests and sample management solutions is aligned with where healthcare is headed in the U.S. and globally over the coming years. With that, I’m pleased to turn the call back over to the operator for Q&A. Operator?
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