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Edited Transcript of OSUR earnings conference call or presentation 8-Aug-18 9:00pm GMT

Q2 2018 OraSure Technologies Inc Earnings Call

BETHLEHEM Aug 23, 2018 (Thomson StreetEvents) -- Edited Transcript of OraSure Technologies Inc earnings conference call or presentation Wednesday, August 8, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Roberto E. Cuca

OraSure Technologies, Inc. - CFO

* Stephen S. Tang

OraSure Technologies, Inc. - President, CEO & Director

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Conference Call Participants

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* Brandon Couillard

Jefferies LLC, Research Division - Equity Analyst

* David Michael Westenberg

CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst

* Max Masucci

Canaccord Genuity Limited, Research Division - Associate

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Presentation

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Operator [1]

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Good afternoon, everyone, and welcome to the OraSure Technologies 2018 Second Quarter Financial Results Conference Call and Simultaneous Webcast. As a reminder, today's conference is being recorded. (Operator Instructions)

OraSure Technologies issued a press release at approximately 4:00 p.m. Eastern Time today regarding its 2018 second quarter financial results and certain other matters. The press release is available on our website at www.orasure.com or by calling (610) 882-1820. If you go to our website, the press release can be found by opening the Investor Relations page and clicking on the link for press releases.

With us today are Dr. Stephen Tang, President and Chief Executive Officer; and Mr. Roberto Cuca,

Chief Financial Officer. Dr. Tang and Mr. Cuca will begin with opening statements, which will be followed with a question-and-answer session.

Before I turn the call over to Dr. Tang, 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 markets, business plans, regulatory filings and approvals, expectations and strategies. Actual results could be significantly different.

Factors that could affect results are discussed more fully in the company's SEC filings, including its registration statements, its annual report on Form 10-K for the year ending December 31, 2017, its quarterly reports, Form 10-Q and other SEC filings. Although forward-looking statements help us 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. The company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after this call.

With that, I would like to turn the call over to Dr. Stephen Tang.

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Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [2]

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Thank you, Joni. Good afternoon, everyone, and welcome to our call. I'm very pleased to report another successful quarter from both the financial and operational standpoint.

Our performance for the second quarter was strong and has exceeded expectations on both the top and bottom lines. The 2 key drivers of growth, molecular collections and our HIV Self-Test franchise continue to demonstrate consistent strength and momentum.

Consolidated net revenues for the quarter were $43.6 million or a 9% increase from a year-ago period. Except for the fourth quarter of 2017, this was the highest revenue performance quarter ever. For the first 6 months of this year, our revenues grew 18% over a highly successful 2017. Some specific highlights from the quarter include the following.

Net molecular revenues increased 7% for the quarter and 33% for the 6-month period. International HIV sales grew 265% and 180% for the quarter and 6 months ended June 30, 2018, respectively. This growth was driven primarily by our HIV Self-Test. We reported consolidated net income of $4.1 million or $0.07 per share for the quarter despite incurring $2.2 million or $0.04 per share in nonrecurring transition charges associated with the executive management changes occurring earlier this year.

We ended the second quarter with over $181 million in cash and cash equivalents on our balance sheet.

We also completed an important initiative during the second quarter. As explained in prior calls, we undertook a thorough review of our business strategy. This process started while I was still Chairman of the Board of Directors and continued after I became CEO in April. We reviewed the findings with our board in July and the board enthusiastically approved the strategy. Later on in the call, I will share with you several key insights from the strategy review.

As you know, Roberto Cuca's appointment as Chief Financial Officer became effective during the second quarter. He's been with the company a little more than 2 months now, and this is his first earnings call since he became the company's CFO. We couldn't be more pleased to have Roberto officially join our senior management team.

So with that, let me turn the call over to Roberto for a detailed financial review of the quarter. And after that, I'll provide some business updates and then we'll open the call for your questions.

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Roberto E. Cuca, OraSure Technologies, Inc. - CFO [3]

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Thanks, Steve, and good afternoon, everyone. As Steve mentioned, OraSure continued its strong performance in 2018 with our second quarter revenue and EPS handily exceeding the guidance we issued at our last earnings call. So let's review what drove those numbers to be higher than what we anticipated and shared with the investment community.

Our second quarter net revenues of $43.6 million exceeded the top end of our guidance range by over $1 million. This variance was driven largely by royalty income and by funding from the U.S. Biomedical Advanced Research Development Authority, BARDA, that both exceeded our May estimates. The royalty income was less easily forecasted because this was only the second quarter in which we received it and the BARDA funding simply reflected a greater uptick in R&D productivity than we had achieved in the past. Because neither of these nonproduct revenue items has associated cost of goods sold, their benefit falls directly to the bottom line and contributed to our EPS of $0.07 per share outperforming our guidance of approximately $0.03 per share.

Moreover, we saw some savings in the second quarter's operating expenses as we adjusted time lines in executing various research projects and marketing programs. These programs and expenses were consciously delayed until the completion and read-out to the board of our strategic review in order to align spending with the approved strategy beginning in the second half of this year. I'll now go into more detail on our Q2 financial results.

Second quarter consolidated net revenues increased 9% to $43.6 million compared to $40.2 million reported in the second quarter of 2017. Our consolidated net product revenues decreased 1% to $38.8 million compared to the prior year period. Higher sales of our OraQuick HIV Self-Test and molecular collections products were able to offset declines in other product lines.

Our molecular revenues rose 7% to $17.2 million in the second quarter of 2018 compared to $16.1 million in the second quarter of 2017.

Sales of our products to academic customers increased 29% to $3.1 million, largely due to increased shipments for a study on autism combined with customer ordering patterns.

Sales of our products to commercial customers decreased 4% to $12.3 million, largely due to the loss of a customer that switched to a different extraction technology. Microbiome sales continued to expand, increasing 116% to $1.8 million in the second quarter of 2018 as compared to the second quarter of 2017.

International HIV sales increased 265% to $7.4 million from $2 million in the second quarter of 2017 due to higher sales of our OraQuick HIV Self-Test into Africa. The test shipped into Africa during the quarter was subject to the support payments under our charitable support agreement with the Bill & Melinda Gates Foundation and a majority of our volume this quarter came from countries outside of the UNITAID, Population Services International, or PSI, Self-Testing Africa or STAR initiative, demonstrating wider implementation of countrywide pilots and initiatives.

Product revenue during the second quarter of 2018 included approximately $1.7 million of support payments associated with the Gates agreement.

Domestic professional HIV sales continued to decline and decreased 22% to $3.9 million in the second quarter of 2018 compared to $5 million in the second quarter of 2017 due to previously described market factors.

International HCV sales in the second quarter of 2018 decreased 72% to $1.5 million from $5.3 million in the same period of 2017, primarily due to the nonrenewal of a foreign government supply contact in support of a countrywide HCV eradication program and the loss of a multinational humanitarian organization customer, who switched to a competing product due to cost. These losses were partially offset by an increase in sales into Asia and Africa as a result of the implementation of new programs or studies.

Domestic HCV sales increased 27% -- decreased 27% in the second quarter of 2018 to $1.7 million from $2.4 million in the prior year period, primarily due to the nonrenewal or delay of grant funding and the discontinuation of a large NGO testing program.

Sales of our cryosurgical systems product decreased 25% in the second quarter of 2018 to $2.4 million compared to $3.2 million in the second quarter of 2017. Sales of our domestic Histofreezer products sold to physician offices decreased 26% to $1.1 million, primarily due to the timing of orders placed by our distributors and competitive losses. Sales of our international OTC cryosurgical product decreased 33% to $765,000 in the second quarter of 2018 compared to $1.1 million in the second quarter of 2017, primarily due to lower sales in Latin America.

Other revenues were $4.8 million in the current quarter, representing $2.1 million of royalty income associated with a litigation settlement agreement; $1.9 million of funding from BARDA for the development of our Ebola and Zika products; and $795,000 of cost reimbursement under our charitable support agreement with the Gates Foundation.

Gross profit percentage for the second quarter of 2018 was 59% compared to 63% reported for the second quarter of 2017. Gross profit percentage for the current quarter decreased versus the prior year period primarily due to product mix, partially offset by the aforementioned increase in other revenues.

Gross profit percentage increased versus the immediately preceding quarter, however, and we expect this trajectory to continue through the second half of the year based on our forecasted sales mix and our expectations regarding foreign currency exchange rates and projected scrap and spoilage.

Our consolidated operating expenses for the second quarter of 2018 were $20.3 million compared to $18.6 million in the comparable period of 2017. This increase was largely due to the inclusion in the second quarter of 2018 of $2.2 million of transition costs associated with the retirement of our former CFO. Second quarter 2018 also includes higher spending on our research and development projects, partially offset by lower staffing costs.

Income tax expense was $2.2 million in the second quarter of 2018 compared to $1.6 million in the same period last year and consist entirely of Canadian taxes due and is reflective of the higher pretax earnings generated by our Canadian subsidiary.

We reported net income of $4.1 million or $0.07 per share for the second quarter of 2018 compared to net income of $5.4 million or $0.09 per share for the second quarter of 2017. The transition costs previously described approximated $0.04 per share in the second quarter of 2018 and primarily reflects noncash stock compensation charges.

We continue to maintain a solid cash and liquidity position. Our cash and investments balance at June 30, 2018, was $181.2 million compared to $176.6 million at December 31, 2017. Cash generated by operating activities during the first 6 months of 2018 was $13.9 million compared to $21.7 million in the same period of 2017, which included a $12.5 million litigation settlement.

Turning to guidance for the third quarter of 2018, we are projecting revenues of $44.0 million to $45.5 million and consolidated net income of $0.10 to $0.12 per share.

And with that, I'll now turn the call back over to Steve.

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Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [4]

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Thanks, Roberto. As discussed earlier, our molecular revenues in Q2 grew 7% over the prior year quarter, which is impressive given the very difficult comparison resulting from our strong performance in 2017.

The consumer genomics market, which includes our largest customer, experienced significant growth last year. Demand for our products during the second quarter of 2018, likewise, increased dramatically and has generally remained at a much higher level than in prior periods. In addition, we are starting to see more identifiable trends in purchasing patterns. There is a noticeable uptick in seasonal consumer genomic demand tied primarily to annual retail promotional events in the holiday shopping season. As a result, we expect to see more variable progression of revenue from quarter-to-quarter. Given that, it's best to view our progress on an annual basis as quarterly progressions can vary. Most importantly, we still expect to see continued growth in our molecular business in 2018 with the growth rate for the full year likely to be in the double-digit range when compared to 2017.

Our molecular business remains very strong, and we are seeing growth from both new customer acquisitions and sales to existing customers. About 11% of Q2 orders came from more than 100 first-time purchasers and 18 of our top 20 customers showed solid growth on a trailing 12-month basis. One of our priorities has been to negotiate multiyear supply agreements with as many customers as possible. We've made great progress in these efforts and now have 7 of our top 20 customers purchasing products under multiyear arrangements. The use of multiyear arrangements should aid our ability to forecast revenues going forward.

We now have over 300 accounts purchasing both genomics and microbiome products, including 3 of our top 20 customers. We continue to believe that this type of synergy between product lines is a very positive trend for our business and is likely to increase in the foreseeable future.

We also acquired 5 new customers from our GenoFIND customization and fulfillment services. So now, half of our top 20 customers use these services. We believe our GenoFIND services provide significant value to our customers by speeding the time to market and improving the overall quality of their offerings.

On the genomics side, we had a very good quarter, in that, we acquired 22 new commercial accounts, 7 of which are test service providers. We also reported strong revenue growth of 29% over the prior year in our academic business, which represents 10% sequential growth from the first quarter of 2018. The second quarter represents our best performance in the Asia-Pacific market with over $1 million in revenue. This represents 44% growth over the second quarter of last year. This type of growth in the Asia-Pacific market is expected to continue throughout the remainder of this year.

One of the more important transactions we completed during the quarter was a multiyear supply agreement with Invitae for our Oragene Dx product. Invitae is a genetic testing company that serves researchers, medical professionals and the pharmaceutical industry. Initial orders under this new agreement began shipping in the second quarter. We also closed an agreement with Embark Vet for the purchase of our PERFORMAgene product for the collection of saliva from canines to provide breed, health and traits information through DNA testing. We are excited about the potential of the canine testing market and believe it can have a positive impact on our business. This area represents an interesting opportunity as pet owners are willing to spend money on the health of their pets and often have more than one dog over the course of their lifetime.

Our microbiome business posted its best quarter ever in Q2, with sales up 116% compared to the prior year period and up 43% sequentially over Q1 of this year. This is our fourth consecutive quarter of sequential growth and the ninth out of the past 10 quarter where we posted year-over-year growth.

The overall health of this business is apparent by the increasing demand for both our collection products and service offerings, along with the growing geographic diversity of our revenue with customers in North America, Europe, the Middle East and Asia-Pacific. The growth in microbiome sales was largely driven by significant device usage in the direct-to-consumer microbiome market, where we saw 176% growth from the second quarter of 2017.

We also saw increased demand for both devices and lab services from boutique wellness companies and pharmaceutical companies in support of microbiome-focused clinical trials.

With respect to services, we are seeing an increasing number of samples processed from the use of our OMNIgene collection device, especially by repeat customers. Importantly, 5 microbiome purchasers have now moved into our top 20 molecular accounts and all of these purchasers are commercial entities. Of our top 20 microbiome customers purchasing in the second quarter, 11 were commercial customers and 3 were purchasing both collection devices and lab services. Of our top 20 microbiome customers, 5 use our products to enable service offerings to the customers, 6 are undertaking clinical trials in support of therapeutic and/or diagnostic development and the remainder are engaged in academic research. So our product offerings are now meeting an increasingly broad range of customer needs. What all of these customers have in common is that they're pursuing actionable insights about human health by analyzing the microbiome and they value the products and services we provide.

We are confident that microbiome will become a substantial contributor to our top line in the coming years. Moreover, this business could easily outpace genomics test volume one day due to the multiple samples that are needed to be collected from the same individual, given the constantly changing organisms found in the microbiome. For this reason, we are very excited about this market opportunity.

Turning to infectious disease. Our global HIV business delivered a strong performance with revenues growing 42% for the second quarter compared to the prior year period. The main reason for this was our international business, which was up 265% for the quarter.

The primary growth driver was our HIV Self-Test business. During the second quarter, we shipped 2.1 million self-tests, a 61% increase over the first quarter of this year. As you know, over the past several periods, much of the demand for this product has come from the STAR program. To date, we have shipped approximately 2.7 million out of the 4 million tests planned for Phase II of the STAR program.

In addition to shipments under the STAR program, we are beginning to see significant uptick in various public health sectors in a number of African countries. Examples include pilot programs designed to demonstrate the effectiveness of HIV Self-Testing, programs that targeting the use of our self-test in various public sector channels intended to serve marginalized populations, early adoption program in various countries and targeted campaigns intended to raise awareness about HIV Self-Testing.

An important growth driver for our HIV Self-Test is the Charitable Support Agreement with the Gates Foundation. This agreement covers 50 countries and the support payments allow us to offer more favorable pricing, which is stimulating demand for our test.

To date, between initial interest, pilots and scale-up activities, we are now serving well over 40 countries in Sub-Saharan Africa, West Africa, Asia, Central Asia, Latin America with our self-testing product. It's important to remember that the majority of our self-testing revenue came from non-STAR purchasers during the second quarter. As discussed in prior calls, we're also continuing to pursue opportunities in the pharmacy market as an additional market channel in many countries, even though these sales are not covered by the GATES agreement.

We continue to believe that HIV Self-Testing represents a significant growth opportunity for OraSure over the next several years. The World Health Organization and UNITAID recently issued a global market and technology landscape report on rapid HIV testing. In addition to recognizing the importance of HIV testing to reach people at risk, who may not otherwise get tested, the report stated that the available procurement forecast suggests significant growth in the global market for HIV Self-Testing in both the public and private sectors up to and beyond 2020. The report further states that the numbers are expecting to increase from about 1 million tests in 2017 to an estimated 16.4 million tests by the end of 2020. Obviously, these are projections, but they provide a further evidence to support our optimistic outlook for this part of our business.

As you heard earlier, international HCV revenues for Q2 declined from prior year quarter, primarily as a result of the nonrenewal of a large foreign government supply contract and the loss of a large international NGO customer as a result of price competition. Our domestic business was also down compared to last year, primarily due to grant funding delays and a large NGO discontinuing its HIV screening efforts.

Nevertheless, we remain confident in our overall HCV business and believe it will continue to be a source of future growth. Interest in HCV testing remains high, and we're seeing the potential for increased available funding for testing programs in the near future.

Here's why. Domestically, we are seeing funding support from pharmaceutical companies that are offering testing grants. For example, Gilead recently announced a grant program to support the elimination of HCV in HIV-infected and high-risk HIV-uninfected populations. The program budget is $3 million with awards expected to be made in December 2018. We are also seeing legislative initiatives moving through Congress that should improve available funding for HCV test programs.

The recent fiscal 2018 spending bill passed in March, included improved funding for federal programs that support HIV and HCV testing. As an example, there's a 15% funding increase received by the Division of Viral Hepatitis and Centers for Disease Control and Prevention in order to bolster the activities of state and local health departments. We're also seeing efforts by Congress to address the opioid epidemic, which we expect to include HCV testing initiatives.

Finally, Congress is advancing a bill to establish a rapid hepatitis C outreach testing program with veteran service organizations and the Veterans Administration. In its current form, this bill would mandate roughly 350,000 rapid outreach tests to reach Vietnam era veterans outside the VA system in an attempt to gauge feasibility for a national program and to establish a prevalence number for this community. This type -- these types of developments are obviously positive, and we believe strongly support our view that funding for HCV testing may improve in future periods.

On the international front, interest in HCV testing and treatment continues to expand, largely as a result of availability of low-cost HCV therapies. We're seeing a number of opportunities in various geographies around the world. As an example, is the growth in sales in both Asia and Africa, where our HCV revenues increased 138% in Q2 compared to 2017. This reflects an increase in demand from existing customers, favorable timing of orders and new customers that purchased our products. We'll continue to pursue these various international opportunities.

Turning briefly to operations. As a reminder from prior calls over the past year or so, we focused on -- much effort on balancing and expanding our production capacity. We've made good progress not only here in Bethlehem, but also in Canada and our Thailand supplier. We are confident that we're making the changes needed to meet the future demand for our products.

We saved the best news for last. The final area I'll address today is our recently completed long-term strategy review. This review includes an assessment of market trends and competition, an inventory of our core capabilities and modeling of several potential business strategies. This work was shared with and endorsed by our board last month. Today, I'd like to share with you a few key themes from that work with the caveat that some of our work must remain confidential due to competitive reasons.

First and most importantly, we see significant growth potential in our core molecular and infectious disease businesses. Several marketplace trends, including the growth in consumer genomics, the high and growing interest in microbiome and systems biology and the ongoing global focus and funding for the eradication of HIV and HCV, all signal opportunities for these businesses with appropriate investment.

The overarching principle underlying our strategy is to maximize the growth potential of our assets and core strengths. We will achieve that by making both internal and external investments, targeting the acquisition of other companies and technologies.

In our external business development activities, we may consider the acquisition of earlier-stage entities that are serving less developed markets in addition to more established revenue-producing entities that will be accretive. I expect the outcome of this updates -- updated strategy will become more evident in the coming months. However, in the meantime, I can share some future overarching themes with you now.

On the molecular side, our core saliva genomics business remained central to our overall molecular strategy, and we intend to invest and grow this key business. We also intend to expand our product portfolio with the introduction of new products that build on our core strengths in the areas of multiomics and system biology. This focus will apply to both our genomics and microbiome businesses.

We'll also look at further enhancement of our end-to-end service offerings, primarily in the microbiome area through customization, fulfillment, laboratory and analytics services.

In infectious disease, we'll continue to focus on expanding our core HIV and HCV franchises globally through innovative testing programs, new registrations and collaborations with our customers and other stakeholders.

Additionally, we intend to protect and grow our HIV professional and self-testing businesses through product improvements and enhanced performance claims. Beyond HIV and HCV, we intend to leverage our strength and relationships with our existing customers by expanding our product portfolio with product synergistics with our existing products.

We are very pleased to have completed our detailed strategy review, and we can now focus our attention on implementation. I look forward to updating you in the coming months on our progress against these strategic goals.

So in conclusion, this is an exciting time for OraSure. The company is well positioned and continues to deliver strong financial results. That combined with a solid balance sheet affords us the opportunity to enhance our growth potential.

We have a number of exciting organic growth opportunities before us, many of which are still in the early days of their potential, especially the microbiome. We have the infrastructure in place to screen, evaluate and acquire complementary external technologies or companies on a timely basis. Our new head of business development is busy these days, to say the least.

Having completed our strategic development work, our priorities are clear and we will endeavor to build on our core strengths in order to deepen the bond with our existing customers and build relationships with new ones and other stakeholders. We will do that by putting our strong balance sheet to work, while remaining selective about what we pursue and the valuations that we pay.

More than 4 months ago, I became CEO and have gotten to know the company in a deeper level. I can say without hesitation, I'm even more impressed by the strength of our management team, the quality of our products and the outlook for OraSure. I will continue to advance innovation here at the company because I believe it's crucial to our continuing growth. I intend to do this by prioritizing efforts to foster a culture that empowers our management team to innovate and then rewards them for their success. I'm confident that we have the right strategy in place and the other necessary pieces to take the company to the next level.

And with that, we'll now take your questions. Operator, please proceed.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Brandon Couillard with Jefferies.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [2]

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Stephen, thanks for those thorough remarks. I'd like to start with the molecular collections systems business. It was down quarter-over-quarter kind of unusual seasonality, I think, to see for that business. Was that tied to any one particular customer, any chance you could spike out the impact of the one lost customer that you mentioned and perhaps elaborate on what device they switched to?

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Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [3]

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Yes, the change in customer, Brandon, was not a direct-to-consumer customer. It was a different product. So that was -- that did not influence our product sales in molecular for direct-to-consumer customers.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [4]

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Okay. I guess, sticking there. You quantified or sort of pointed to or alluded to the multiyear contracts. Do those include minimums and kind of what's the average duration of those? And when you referred to, I think, Stephen, the variability of the DNAG business, any, I guess, indications that you can sort of give us that how we should think about growth in that segment, kind of moving through the back half of the year, understanding that fourth quarter is seasonally stronger period?

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Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [5]

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Right. So multiyear agreements, we don't disclose. They typically had minimums and they typically are multiyear. I think the best way to view the molecular collections business is growth on an annual basis. And I think, 2017 being a breakout year with some unevenness quarter-by-quarter makes the comparisons year-on-year from 2017 to 2018 difficult, but I think these multiyear agreements will actually help as well our stronger relationships with customers to predict their demand.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [6]

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One last one, Stephen, with respect to the strategic review. Did that elucidate any finding as to whether you think you're spending enough on R&D? And then any comment or color you can share with us in terms of, like, any divestitures that may be considered? I didn't hear you mentioned risk assessment or cryo as your priority areas in the portfolio.

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Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [7]

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Well, we're not ready to discuss any particular divestiture and, clearly, our risk assessment and cryo contribute to our revenue in our earnings. I don't think we have the same growth expectations for those businesses as we do for our core businesses in infectious disease and molecular. And just regarding resource allocation, I think, that's something we're examining right now, but I think that our spending in R&D and more broadly, in innovation, which I think includes the functions not only in R&D, but in business development and strategic marketing are likely to increase as you would expect from a growth company.

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Operator [8]

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Your next question comes from David Westenberg with CL King.

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David Michael Westenberg, CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst [9]

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So just a quick question in terms of timing and kind of understanding the seasonality in consumer genomics. I know it's early. I know you said, it's starting to get on understanding. You're starting to sign deals with business like

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playing out in the market. Number one, the array company kind of said -- they're the company that does a lot of the consumer genomics array said, this quarter would be really strong -- was really strong, but -- our Q2 was really strong, but Q3 is probably a little bit of a slowdown and then when you look at your revenue, you see ancestry up sequentially, but yet, commercial was down sequentially. So saying all that, can you maybe just give a tiny bit more color in terms of how we should be kind of thinking about these different dynamics at play in trying to forecast consumer and commercial revenue here?

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Roberto E. Cuca, OraSure Technologies, Inc. - CFO [10]

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Thanks, Dave. It's Roberto here. So I'll take a first crack at that. So one of the important distinctions between ancestry and some of our other consumer -- customers is that we get paid by ancestry based on their end-user purchases, whereas we get paid by some of our other customers based on how much they buy from us. So some of the variability from quarter-to-quarter that we can see is based on our customers' own estimates of what they're going to need in the existing quarter and then upcoming quarters, whereas with our royalty payments, we're going to see that more directly resulting from end-user demand. That said, over the course of the full year, we'd expect that the overall ebb and flow of the sales should become more consistent between those 2 types of customers and that you'll see seasonality similar to what you saw in prior years. So that's how we would think about that. We do continue to expect to see growth in this business, notwithstanding some quarter-to-quarter variability and are very optimistic about the prospects of the business for the year.

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David Michael Westenberg, CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst [11]

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Right. That was very helpful. So just the guide was nice for Q3. Can you give us a little bit of dynamics between how much of it contributed other revenue? Or do you anticipate contributing from other revenue versus product revenue for Q3?

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Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [12]

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So we don't break down our guidance by revenue lines. I'd expect, though, that you'll see some consistency between quarters, but again, because there's some variability from quarter-to-quarter, the exact proportions between other revenues and product revenues isn't something that we disclose as part of the guidance.

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David Michael Westenberg, CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst [13]

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Definitely. Would -- is it fair to say that maybe this quarter had a lot more other revenue than you would anticipate for maybe future because that -- certainly it's been that way in the past [where] this is definitely a different spike up in the revenue. Is that fair?

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Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [14]

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No. So 2 of the big contributors to other revenue are the royalty payments. And because those are tied to consumer genomics consumption, to the extent that there is continued use of those products in the third quarter versus the second quarter, you could well see that payment being similar in third quarter to the second quarter. The other big contributor is BARDA payments and that relates directly to the amount of R&D that we do on our Ebola and Zika programs. And so to the extent that we continue to progress those programs at the same rate that we have in the past, you could see that contributor as well being similar in the third quarter to the second quarter. So I don't think there is any -- go ahead, Dave.

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David Michael Westenberg, CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst [15]

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No, no. I'm just n-- I mean, acknowledging. Okay. I guess, just one more then. Just on Truvada, the HIV preventative drug, I continue to see those commercials. I was on an airplane yesterday, it was playing a commercial. So is -- do you see that as a potential driver to the typically weak HIV? Is there any opportunity for partnership and I'm saying that with the background that from what I understand, prescriptions for Truvada require somebody be tested for HIV?

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Roberto E. Cuca, OraSure Technologies, Inc. - CFO [16]

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Yes, I think the whole area of prep as a new dimension to our HIV testing business and you're absolutely right that those that are on that prescription have to have routine lab tests and routine tests for HIV along the way. I think we factored that into our projection for the business for the year ago. So I think, it's an interesting development for the industry, though.

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Operator [17]

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(Operator Instructions) Your next question comes from Mark Massaro with Canaccord Genuity.

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Max Masucci, Canaccord Genuity Limited, Research Division - Associate [18]

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This is Max Masucci on for Mark. So your microbiome segment is still small on an absolute dollar basis, but it seems -- seen a strong growth for a number of quarters now. What specifically drove microbiome in the quarter? What do you think is underappreciated? And how is it generating interest from pharma customers? And if you could provide an update on your partnership with Janssen and Harvard, that would be great.

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Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [19]

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Okay, Max, thanks. I can't give you specific updates on the partnerships, but I can say that I think what's driving interest on microbiome is, first, research in that area and we've certainly commented on the breakdown between commercial research and academic research. I think, particularly for the gut microbiome, there was a race afoot amongst pharmaceutical companies to address irritable bowel syndrome, Crohn's colitis and other diseases like that. And once you see a therapy on the marketplace and a companion diagnostic, I would expect that the use of our samp collection kit will grow rapidly. So that -- we're close to that tipping point, but we're not quite there yet. So I think those commercial interests are really driving a lot of the activity there. The other aspect is what I raised in terms of multiomics and systems biology, which is combining features of the human genome and microbiome along with other aspects, the other omics, metabolomics, genomics, proteomics, et cetera, together to create a sort of holistic view of biomarkers. And so, that's an emerging inversion field in its own right. So I think, there's a multiplier effect both on the commercial side and on the research side.

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Max Masucci, Canaccord Genuity Limited, Research Division - Associate [20]

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That's helpful. And so you were chosen to supply in the Mayo Clinic and The Scripps Research Institute with, I believe, 13,000 initial saliva kits for DNA sponsored all of those projects. How is that relationship progressing? And what are you seeing in terms of additional opportunities for population sequencing initiatives?

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Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [21]

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Right. I think our relationship is going well, and I won't comment specifically on that project, but I think that as you see these large epidemiological studies emerge and the need to enroll patients quickly also emerges, that tips heavily in favor of using our product, particularly these are for clinical trials or for clinical purposes. So we cultivate studies like that very actively. You saw, for instance, this last quarter, we announced our agreement with the Simons Foundation on autism. I think you could expect a lot other transactions like that to emerge over time for us.

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Operator [22]

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That brings an end to the Q&A session of today's call. I will now turn the call over to Dr. Tang for closing remarks.

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Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [23]

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Thank you for participating in today's call and for your continued interest in OraSure. We wish you a very happy afternoon and evening. Thank you very much.

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Operator [24]

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This concludes today's conference call. You may now disconnect.