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Edited Transcript of OSUR earnings conference call or presentation 6-Aug-19 9:00pm GMT

Q2 2019 OraSure Technologies Inc Earnings Call

BETHLEHEM Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of OraSure Technologies Inc earnings conference call or presentation Tuesday, August 6, 2019 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 & Principal Accounting Officer

* 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

* John Hsu

Raymond James & Associates, Inc., Research Division - Research Analyst

* Max Masucci

Canaccord Genuity Corp., 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 2019 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 p.m. Eastern Time today regarding its 2019 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 ended December 31, 2018, its quarterly reports on Form 10-Q and its other SEC 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. The company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the 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, Jeanne. Good afternoon, everyone, and welcome to our call. Our second quarter revenues were lower than expected, due in part to the changing dynamics of the consumer genomics market, and to the transient effect of an approximately $1 million delayed HIV self-test shipment that slipped into the third quarter.

Nonetheless, we delivered a very strong bottom line for the second quarter of 2019. In addition, we continue to execute against our innovation-driven growth strategy with much attention focused on evaluating potential business development opportunities. Overall, and despite some headwinds in the consumer genomics market, we remain confident in our business. The opportunities before us are abundant, and we are well positioned to execute against our strategic priorities.

In past calls, we have described the market changes that are affecting the consumer genomics business as companies in that market are changing their approach to direct-to-consumer testing. These trends impacted our second quarter performance and will likely continue to evolve in the near term. Nevertheless, the rest of our business remains largely on track.

Outside of the single large customer, our consumer genomics business is healthy. It grew by strong double digits in the second quarter, excluding that customer, and we still expect it to grow by double digits for the full year 2019, again, excluding that customer. The microbiome market remains a very bright spot with robust growth and enormous potential. We expect this revenue line to grow at double digits in both organic sales and including the acquisition of CoreBiome over the full year.

The integration of our recent acquisitions, Novosanis and CoreBiome also continues to go well. CoreBiome, in particular, is helping to strengthen our microbiome business with recent customer wins for its cutting-edge laboratory and bioinformatic services. We have previously mentioned multiomics as an emerging approach to evaluating health that offers significant growth potential. We continue to achieve success in cross-selling our genomics and microbiome products as we stake out a leadership position in this important and emerging market.

In infectious disease, our HIV self-test business remains strong, although our second quarter performance was negatively affected by the slippage of a $1 million order I just mentioned from the last week of June into the first days of July. Notwithstanding inter-quarter variability of ordering patterns in the international markets that can change from year-to-year, we continue to project double-digit revenue growth for our global HIV franchise in 2019, primarily due to our self-test business.

Our HCV business grew domestically during the quarter as a result of additional funding that we expect will likely continue in future periods. While international revenues were down for the quarter, this was largely a timing issue and the entire global HCV business showed strong growth for the first 6 months of the year compared to the prior year period.

Our balance sheet is very strong with nearly $187 million in cash, which equates to over $3 per share of our stock price. So despite some challenges, our overall business remains strong, and we are growing in our strategically targeted areas. We continue to believe that the strength of our businesses and the prospects for both our infectious disease testing and Molecular Solutions segments, and we remain committed to bringing our customers and the people they serve, the tools, services and data driven insights, they need to get reliable, actionable results in their most critical scientific and healthcare questions.

So with that, I'll now turn the call over to Roberto for his financial review. Then I'll provide some additional commentary on our business and some of the trends were likely to affect the rest of the remainder of this year and beyond.

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Roberto E. Cuca, OraSure Technologies, Inc. - CFO & Principal Accounting Officer [3]

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Thanks, Steve, and good afternoon, everyone. Our second quarter net revenues decreased 11% to $38.8 million from $43.6 million reported in the second quarter of 2018. Our net product and services revenues decreased 4% to $37.3 million compared to the prior year period.

Our molecular net revenues, including other revenues, decreased 4% to $18.5 million in the second quarter compared to $19.3 million in 2018. Royalty income declined 47% to $1.1 million in the second quarter of 2019 from $2.1 million in the same period of 2018, and showed only 3% growth from the immediately preceding quarter versus 31% growth sequentially from the first quarter to second quarter of 2018.

Molecular product revenues increased 1% to $17.3 million in the second quarter of 2019 compared to $17.2 million in the second quarter of 2018. Sales of our genomic products declined 7% to $14.2 million, largely due to lower customer demand, primarily from a large consumer genomics customer that changed its promotional strategy, which impacted its purchasing patterns. Notably, excluding this single customer, Genomic product revenues grew over 20% compared to the second quarter of 2018.

Microbiome sales increased 63% to $3 million from $1.8 million in the second quarter of last year due to the inclusion of lab services revenues generated by our newly acquired subsidiary, CoreBiome, as well as healthy double-digit organic growth.

Domestic HIV sales decreased 14% to $4.5 million in the second quarter of 2019 compared to $5.2 million in the second quarter of 2018, largely due to lower sales of our professional product as a result of previously reported continued product and price competition and customer ordering patterns within the quarter.

International HIV sales decreased 27% to $5.4 million from $7.4 million in the second quarter of 2018 due to customer ordering patterns and a slippage of an approximately $1 million order from the last week of June to the first days of July, partially offset by higher sales of our HIV self-test into Asia and Europe.

Domestic HCV sales increased 22% in the second quarter of 2019 to $2.1 million from $1.7 million in the prior year period, largely due to increased government funding that is allowing for the expansion of existing HCV testing and treatment programs and the addition of new programs. Customer ordering patterns also contributed to this increase.

International HCV sales in the second quarter of 2019 decreased 33% to $1 million from $1.5 million in the same period of 2018, primarily due to the timing of customer orders. Other revenues were $1.6 million in the current quarter compared to $4.8 million in the prior year. The decrease is largely due to lower royalty income and decreases in BARDA funding and cost reimbursement under our charitable support agreement with the Gates Foundation. The reduced BARDA funding reflects the conclusion of our projects under this program and our rotation of R&D resources to products that are aligned with our long-term growth strategy.

Gross profit percentage for the second quarter of 2019 was 64% compared to 59% reported for the second quarter of 2018. Improved product mix associated with an increase in higher gross profit percentage of product sales and lower royalty expense was partially offset by the decrease in other revenues, which contribute 100% to the gross profit percentage and by the lower margins generated by CoreBiome and Novosanis.

Our operating expenses for the second quarter of 2019 were $19.7 million compared to $20.3 million in the comparable period of 2018. Operating expense in the second quarter of 2019 included $249,000 of noncash acquisition-related contingent consideration costs and incremental operating expenses generated by CoreBiome and Novosanis. There were no similar acquisition-related costs in the second quarter of 2018.

The second quarter of 2018 did include $2.2 million of transition costs associated with executive management changes that occurred during that period. There were no material transition costs in the second quarter of 2019.

In the second quarter of 2019, we reported income tax expense of $1.4 million compared to $2.2 million in the same period last year. The decline in tax expense reflects the lower pretax earnings generated by our Canadian subsidiary and the results generated by Novosanis. We reported net income of $4.4 million or $0.07 per share for the second quarter of 2019 compared to net income of $4.1 million or $0.07 per share for the second quarter of 2018.

We continue to maintain a solid cash and liquidity position. Our cash and investments balance at June 30, 2019 was $186.6 million compared to $201.3 million at December 31, 2018. During the first quarter of 2019, we used $13.2 million of cash to acquire CoreBiome and Novosanis. Cash generated by operating activities for the first 6 months of 2019 was $4.7 million compared to $13.9 million in the same period of 2018.

Turning to guidance. For the third quarter of 2019, we are projecting revenues of $39.0 million to $40.5 million and net income of $0.04 to $0.05 per share. For the full year of 2019, we are projecting revenues of $165 million to $170 million and net income of $0.24 to $0.26 per share, up from our previous expectation of $0.22 to $0.24 per share. These projections do not account for the impact of changes in the fair value of acquisition-related contingent consideration or potential business development transaction costs since the full extent of these items cannot be determined at this time.

The $5 million downward revision to our full year revenue guidance from $170 million to $175 million for 2019 reflects continued softness in the consumer genomics market, including our expectations for royalties associated with this market. Despite that, and as Steve mentioned earlier, we continue to expect that our global HIV testing revenues, our microbiome revenues and our genomics revenues, excluding the one big genomics customer, will all grow by double digits this year compared to 2018.

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. I'd like to continue with some further comments on our molecular business, and then I will turn towards infectious disease.

The human genomics market has continued to moderate since our last earnings call. Historically, Ancestry testing has been the largest part of the human genomic market and a key driver of our business. Some of the larger players in this area have reduced their promotional support and changed their business models to focus either on health offerings or therapeutic discovery and development. The high cost to compete in this consumer market has also, in our view, negatively impacted the submarket. Although our business was specifically impacted by lower revenues from a large consumer genomics customer changing its promotional strategy and ordering patterns, we are now seeing additional consumer genomics customers reevaluating their business models in an effort to be more competitive.

We see these ancestry submarket trends continuing for the foreseeable future. Nevertheless, other subsets of the genomics market are more robust, with higher growth prospects, mainly in the area of disease risk management and companion animal and lifestyle testing.

Disease risk management encompasses genetic tests that provide information about an individual's health risk, including an individual's predisposition to diseases such as cancer and carrier status. We continue to see a steady increase in the number of consumers in this area and expect the growth potential in future periods will be significant. In fact, during the second quarter, 15 of our top 20 customers based on a trailing 12-month revenues were in disease risk management submarket. And more than half of the 45 new commercial genomics customers added during the second quarter were in this category. We're now seeing more customers in the disease risk space moving to patient-initiated model where the test results are given back to the patient through a medical practitioner.

For example, one customer recently announced a patient-initiated service to provide consumers with genetic testing along with telemedicine-enabled clinical guidance and the ability to share the results with the consumer's personal physician. We expect other consumers to pursue similar patient-initiated offerings.

Another significant part of disease risk management relates to population-based studies. These large cohort studies provide disease risk information back to the participants and are an important opportunity for OraSure. They generally require the use of an FDA-cleared collection device, which is significant since our Oragene and ORAcollect devices are the only FDA-cleared devices for the collection of DNA and Saliva.

One customer, Helix, is an example. As mentioned in our call in May, Helix's healthy Nevada project has enrolled over 35,000 participants since its launch 2 years ago and has expanded to the entire state of Nevada. Helix is also involved in the recent Florida health system project through Advent health, which will extend to 9 other states following a successful launch in Florida.

Another population study is a recently launched Sequence BioCanada Newfoundland Genome project. This project will leverage Newfoundland's founder population to study disease in order to generate data for drug development. The current research plan anticipates the collection of more than 100,000 saliva samples.

We're also seeing increased demand in the animal testing and lifestyle submarkets with several new customers in these categories added during the second quarter. In animal testing, a larger existing customer recently entered into a new agreement for the use of our PERFORMAgene device.

We also have new customers that are offering lifestyle genetic testing. They are focused on genetic sensitivity to cannabis strains. Nutrigenomics, which studies the effects of food on gene expression and how genetic variations affect the nutritional environment in vitamin supplement genetic testing. In fact, we now have several customers in the emerging cannabis market who are conducting research or providing genetic testing that will ultimately lead to individual recommendations on the optimal strain and amount of cannabis for health benefits. We are working with several other companies who are also exploring this area.

While these submarkets are only in their early days, we are excited about the growth potential in our current market position. Demand for academic researchers in the genomic market is also strong. In the second quarter, we saw almost 60 new studies initiated by the -- in the academic research market by our customers, with 40% of those studies outside of North America.

Outside the United States, genomics represents an important opportunity. However, as in the U.S., there are challenges. We intend to continue our focus on developing the Asia Pacific and other foreign markets and believe they can be an important growth contributor to our business going forward.

The underlying strength of our genomics business was clearly evident in the second quarter. We added more than 250 new genomics customers in the second quarter, continuing the prior pattern of new customer additions. Our collection device in unit sales to customers, other than the large consumer genomics company, grew 22% in the second quarter compared to the comparable quarter in 2018 and 20% from the first quarter of this year. Sales to disease risk management accounts for the second quarter were up over 64% compared to second quarter 2018.

In summary, despite the challenges in the genomics market, which were exacerbated by the impact of our large consumer genomics customer, we believe our overall genomics business is healthy. And excluding that large customer, should generate double-digit revenue growth during the remainder of the year.

Consistent with prior periods, the microbiome business delivered another strong quarter. Second quarter revenues were up 63% when compared to 2018 due to an increased service revenues and higher kit sales. Of our top 30 microbiome accounts, which are largely commercial customers, 16 have purchased in both the first and second quarter of this year, demonstrating momentum and consistency in this market. Clinical trials continue to be a source of growth in our microbiome business. Total revenues derived from clinical trials was up 26% in the second quarter versus the second quarter of 2018.

Two of our largest microbiome accounts now have programs transitioning from Phase I to Phase II clinical trials, therefore, demonstrating the value of our microbiome products and services for the pharmaceutical industry.

Academic interest in our microbiome offerings is also continuing with research customers showing interest in observational and interventional studies at scale. One example is an academic customer that is exploring the gut microbiome and the impact of probiotic interventions in a malnourished population in Kenya. This customer is also running an industry-sponsored trial assessing the gut microbiome in connection with inflammatory bowel disease.

Another study called the Michigan Microbiome project is now in its third year and continues to recruit subjects for a multiomic study of dietary fiber and butyrate production in the gut through the study of DNA and metabolites.

Additionally, CoreBiome is increasing its contribution to our microbiome business. CoreBiome signed its first-ever direct-to-consumer or DTC customer and is now officially offering services as a back-end diagnostics lab for the DTC microbiome market.

CoreBiome is also providing shotgun metagenomic testing services for a large government-sponsored study.

Finally, CoreBiome's first academic collaboration publication was recently published in Cell Host & Microbe and received coverage in the mainstream media, such as Discover magazine. This study showed the value of the shallow shotgun sequencing services provided by CoreBiome, when analyzing the impact of diet on the gut microbiome.

We continue to see the growth potential in new products and services focused on the microbiome and broader field of multiomics. This emerging area of life science and data analytics provides a multifactorial examination of an individual's health. As we move towards becoming a leader in this field, we continue to see nice synergies within our current molecular business as more of our existing human genomics customers are introducing microbiome components to their studies and offerings.

We saw a 100% increase in customers who are using both genomics and microbiome kits during the second quarter of 2019 compared to the prior year quarter. This trend will enable us to advance our multiomics strategy in order to maximize potential for this important and emerging area in human health.

Finally, the acquisition of Novosanis has expanded our collection capability to other specimen types. In this case, urine. NovoSanis' Colli-Pee urine collection device is designed to allow the collection of first void urine, which due to its analyte-rich content can be used in a number of applications. Since the acquisition, Novosanis entered into a worldwide non-exclusive agreement with Fujirebio for the distribution of the Colli-Pee collection device for use with Fujirebio's INNO-LiPA HPV Genotyping Extra II assay. Recent feasibility studies with the FujireBio assay, which can identify up to 32 HPV genotypes, showed promising results on samples of self collected first void urine. Use of Colli-Pee volumetric and standardized urine collection device can help ensure more accurate detection with the Fujirebio assay because first void urine contains higher amounts of HPV DNA when compared to random or midstream urine samples.

The Colli-Pee device is also being used with lab developed tests or LDT applications here in the U.S. One application, the Colli-Pee device may be used with the Exosome Dx, which was recently acquired by Bio-Techne's ExoDx Prostate IntelliScore EPI test, which allows a physician to predict if a patient presenting for internal biopsy does not have a high-grade prostate cancer. This assay was recently included as a recommended test in the National Comprehensive Cancer Networks' clinical practice guidelines in oncology for prostate cancer early detection.

In addition, the national government services, which is the Medicare Administrative Contractor for Exosome Dx posted a draft for a local coverage decision for biomarker testing prior to initial biopsy for prostate cancer diagnostic, which includes proposed coverage for the EPI assay. We believe this and other LDC applications represent potential significant opportunities for the Colli-Pee business.

Turning now to infectious disease. Our global HIV revenues were down in the second quarter compared to 2018, primarily a result of timing for orders of our OraQuick HIV self test. We experienced lower sales in Africa that were only partially offset by growth in Asia and Europe. As I mentioned previously, our self-test sales can be a bit choppy on a quarter-by-quarter basis as individual countries deal with factors such as funding issues and uncertainty around product utilization. This is part of the normal development cycle within a country-based market that involves the start-up of new testing program where awareness needs to be created and ongoing demand needs to be assessed, so that routine utilization could be determined. In this case, deployment of self-tests occurred more slowly in the second quarter as country worked through these issues.

We still support the projections issued by WHO that self-test demand will increase from 1 million tests in 2017 to an average range of 16 million tests per year by the end of 2020, with the high end of that range reaching just over 19 million tests. As we shared in previous calls, Phase II of the Star or Self-Testing Africa program has largely ended yet there is still much opportunity for HIV self testing. In addition to the STAR countries deploying tests, we continue to see new country registrations and demand that we expect to materialize into new orders.

The HIV self-test market has continued to develop as countries achieve scale in their programs and begin to reorder product and as more countries move from pilot to full-scale as the number of country registrations for our product continues to increase. We are focused on helping to improve efficiency in countries already deploying our self test. Specifically, we're working with customers to develop methods to deploy the test faster and more efficiently than has been occurring in the past. We have had discussions with some major stakeholders such as PEPFAR, Unitaid and PSI on ways to improve test deployment through additional training and implementation of best practices.

There continues to be a strong support for HIV self-testing in the public health community. In addition to WHO, the report that I just mentioned, the Journal of the International AIDS Society recently published a comprehensive review that supports HIV self-testing as a critical response strategy in controlling the epidemic.

More recently, in July, we attended the International AIDS Conference in Mexico City, where HIV self-testing had significant visibility. In particular, presentations were made by the WHO and USAID that express continued support for HIV self-testing as a key tool to identify new positive patients. There was also a recent report published by PSI that presented data indicating that HIV self-testing is more cost-effective in identifying new positives than traditional rapid testing in clinics.

This, what we've seen in our own business, combined with information from our actual and potential customers and continued recent market developments, we remain optimistic about the overall long-term growth potential for our HIV franchise. As a result, we still project double-digit growth in global HIV revenue for the full year.

Turning briefly to HCV. This part of the business continues to perform as it has in recent quarters. Domestic revenues increased for the quarter as a result of the initiation of new programs and expansion of existing programs, funded primarily by the Centers for Disease Control and Prevention and state jurisdictions that are finding new additional funding within their existing budgets.

Internationally, revenues were down for the second quarter, primarily due to timing of orders. We expect to see ongoing international demand in future quarters. As noted in the beginning of our call, the global HCV business performed quite well for the first 6 months of the year, and it is expected to contribute growth for our infectious business going forward.

So in closing, despite some continuing disruptions in the consumer genomics market, our overall business is well positioned to compete and succeed. Our innovation-driven growth strategy will serve us well in the coming years as we have targeted significant nascent opportunities that have yet to blossom. Disease risk management, microbiome and multiomics research are expected to require an enormous amount of genetic testing, and we intend to capitalize on those opportunities.

Moreover, our strong balance sheet affords us the opportunity to execute on our steadfast commitment to acquire additional products and services to augment our current capabilities. Our pipeline of acquisition candidates is replete and robust. We expect continued growth from our global HIV and HCV franchises in the future and expect those that can best serve the market for molecular solutions will be handsomely rewarded. These growth platforms give us confidence that our best days are still ahead.

As I noted in the outset of this call, we remain committed to bringing new customers and the people they serve, the tools, services and data-driven insights they need to get reliable, actionable answers to their most critical scientific and healthcare questions, and we are confident in the future success of our company. 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) Our first question comes from the line of Max Masucci from Canaccord.

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Max Masucci, Canaccord Genuity Corp., Research Division - Associate [2]

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So gross margins came in over 64%. It is above where we were modeling despite 47% decrease in ancestry royalties, which come in at 100% gross margin. So can you just dive deeper into some of the drivers of the strong gross margins in the quarter, and including some of the specific components of the product mix?

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Roberto E. Cuca, OraSure Technologies, Inc. - CFO & Principal Accounting Officer [3]

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Sure. Thanks for the question, Max. So gross margin percentage for us is driven by mix at both the business unit level and then at the product level within business units and then at the customer level as well.

So we've talked in the past about how larger customers with whom we have long-term supply agreements in exchange for the commitments that they provide for the longer-term purchasing, get some concessions on price, and as those larger customers buy smaller amounts from us during the period, our gross margin percentage will actually go up.

So for example, we've also mentioned in the past that academic purchasers, which tend to buy in smaller volumes, pay at the higher end of the range of our pricing range. So that's one of the drivers is the shift amongst customers at, for example, at the genomics business level.

Another is we've stopped paying a royalty or we had an expiration of our royalty for some of our self-testing devices, that royalty expired around the middle of last year. So we're seeing the annualization of the benefit this year.

And then we have also seen some benefit from COGS improvement projects that have applied across the business, but have had a particular impact in the OraQuick line of self-testing products.

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Max Masucci, Canaccord Genuity Corp., Research Division - Associate [4]

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And next one on the guide, I guess, for Q3, what gives you confidence that your Q3 guide includes conservative enough assumptions to achieve at least the low end of the guide? And we've seen growth rates bounce around in both your segments. I guess, how would you judge your visibility into your different segments today compared to, say, a year ago? And then if you could just parse out any specific assumptions embedded in the full year guide?

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Roberto E. Cuca, OraSure Technologies, Inc. - CFO & Principal Accounting Officer [5]

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Sure. So the biggest driver, so I'll start with the full year. The biggest driver of the full year decrease of $5 million from the prior range was really that ongoing softness in the consumer genomics business that a number of other participants in this market has been experiencing.

That said, the way our orders come in, the immediately next quarter is, for obvious reasons, the one that we have the best visibility into. And typically, at this point in the quarter, since we're already part way through the third quarter, we have a pretty good sense for what the orders are already under our belt, and that will be going out towards the remainder of the quarter. So there's a good reason for us to feel good about the third quarter, and we believe that with the decrease that we've applied for the full year, we've captured the remaining extent of the softness in that business for the back part of the year.

I would point out one thing, which is that, as Steve mentioned during the prepared remarks, we did have an order that was slated to go out at the very end of June, and would have been part of the second quarter, but that moved into the third quarter due to some shipping constraints to the tune of about $1 million, so that was one of the drivers of our results versus our prior second quarter guidance. We continue to monitor our shipping ability and stay on top of those orders and expect that the risk of that has been minimized.

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Max Masucci, Canaccord Genuity Corp., Research Division - Associate [6]

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And then one more if I could squeeze one in. So total molecular collections jumps over $7 million sequentially, is a bit of a surprise to us. Can you help us understand just the sequential improvement? And can you just touch on maybe the level of contribution from CoreBiome and Novosanis? I guess, said a different way, can you help us understand what percentage of the 63% growth in microbiome revenues were contributed by CoreBiome and Novosanis?

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Roberto E. Cuca, OraSure Technologies, Inc. - CFO & Principal Accounting Officer [7]

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So Novosanis is not part of microbiome, but CoreBiome is. So of the 63%, as we said, we got healthy double-digit growth just from the organic part of the business. And then CoreBiome would have contributed to the remainder of that business.

Another thing I'll point out as far as growth in our molecular business, we did say at the beginning of the year that we expected to see a contribution on the order of $4 million to $7 million in revenues from both CoreBiome and Novosanis together. Given the size of that revenue contribution and that they're both growing businesses, you would expect that, that contribution will ramp up over the course of the year. And so you'll see more in the third and fourth quarters than you did in the first and second quarters, so some of that growth is what contributed also to the sequential growth for our molecular business.

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Operator [8]

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Our next question comes from the line of John Hsu from Raymond James.

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John Hsu, Raymond James & Associates, Inc., Research Division - Research Analyst [9]

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I guess, just going back to the guide for a second. Can you help us think about maybe the contribution for the large customer in the quarter, maybe the year-over-year headwind associated with that? And then just last one with that large customer, are you still expecting them to track kind of closer to the annual minimum commitment that's inherent in the contract for this year?

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Roberto E. Cuca, OraSure Technologies, Inc. - CFO & Principal Accounting Officer [10]

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So let me answer that second question first. So we do expect them to purchase to their annual minimum. As we've pointed out in the past and as we've cautioned in the past, the comp -- their annual minimum is tied to their contract year, not to the calendar year, so they signed the agreement in November of 2017. So the annual minimum will apply to the November to November contract years.

That said, their next contract year period also has an annual minimum. So depending on how they decide to distribute that in the next contract year that could -- some of that could come in, in December of this year or it could be timed out into more of next year.

As far as how much of the revenues came in this quarter from that major customer, when we release our Q, you'll see that 13% of our revenues for the quarter came from that single large customer.

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John Hsu, Raymond James & Associates, Inc., Research Division - Research Analyst [11]

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I guess, just also on the bottom line, you actually came in better than we were looking for. And obviously, we're able to raise on the bottom line despite lowering by $5 million on the top line. So I guess, just within that, embedded within that, how are you thinking about the royalty contribution, net-net versus prior? It sounds like it could be a little bit weaker, but should we expect that to trend similar to the $1 million per quarter in the first half? Just any help on -- or color on that would be very helpful.

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Roberto E. Cuca, OraSure Technologies, Inc. - CFO & Principal Accounting Officer [12]

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Sure. So we haven't provided any guidance specifically on our revenue -- excuse me, on our royalty expectations for the year. Although we -- as we did mention, the part of the $5 million reduction in our guidance is attributable to both the general consumer genomics and our expectations for the royalty associated with that. That said, one of the reasons for our ability to beat in this quarter and to improve our bottom line expectations for the year has to do with efficiency projects that we have ongoing with some timing around R&D projects and business development projects. And just overall expectations for rate of things like hiring and investments across the business. But we continue to expect that we are investing into both R&D and sales marketing at rates that are appropriate to help us achieve our longer-term goals of double-digit revenue growth.

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Operator [13]

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(Operator Instructions) We have a question from the line of Brandon Couillard from Jefferies.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [14]

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Roberto, I want to come back to the guidance for the full year. It implies a fourth quarter step-up of about 40% to 50% sequentially from your third quarter guidance, can you sort of speak to the level of confidence and visibility around that? And what the key drivers of that sequential increase would be?

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Roberto E. Cuca, OraSure Technologies, Inc. - CFO & Principal Accounting Officer [15]

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Certainly. So a couple of things. So as we've mentioned with regard to our international HIV self-testing program, we've experienced lumpiness in this year that isn't exactly replicating the lumpiness that we experienced last year, so part of what's driving that is our visibility into ordering around those tests that we expect to come in later in this year based in part on re-upping of programs that have already been put in place and based in part on our insight to programs that are about to be initiated and guidance from ministries of health around those.

The second part is that, as we pointed out in the past, in the consumer genomics market much of the purchasing around that is done as gifts for the end of year holidays. And we do expect that notwithstanding a full year-over-year reduction in the amount of promotion and discounting that we understand to be being done by some of the larger players in that market, we still will be seeing that sort of seasonality, that sort of holiday-associated volume later in the year.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [16]

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Could you just update us with the number of international HIV countries in which you have product registrations as well as those that are pending? Kind of looking for some of the KPIs that are sort of leading indicators that we can point to that might backstop kind of your confidence in a stronger second half?

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Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [17]

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All right, Brandon. So you'll recall that the Bill and Melinda Gates Foundation creates eligibility for 50, 5-0 countries in the world. We currently are registered in 15 countries. We have registrations pending in 17 more and we're pursuing many more. So if you look at it in terms of current penetration, 15 out of 50 and then a total of 34 either registered or in the process to register against the 50, there's considerable upside against that agreement. And you may recall that there's also the STAR program, which somewhat overlaps with the Gates Foundation for 20 or 30 countries. And so we feel very strongly that we're getting traction in countries that we've already -- where we already have a presence. In my remarks, I said we're working about scaling towards bigger goals in those countries. But also broadly speaking, across the world, we have a lot more opportunity through the Gates Foundation agreement.

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Operator [18]

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(Operator Instructions) That brings us to the end of 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 [19]

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Great. Thank you all for your participation on the call and your continued interest in OraSure. We wish you a happy afternoon and evening. Thank you.