U.S. Markets open in 2 hrs 59 mins

Edited Transcript of OSUR earnings conference call or presentation 6-Feb-19 10:00pm GMT

Q4 2018 OraSure Technologies Inc Earnings Call

BETHLEHEM Feb 8, 2019 (Thomson StreetEvents) -- Edited Transcript of OraSure Technologies Inc earnings conference call or presentation Wednesday, February 6, 2019 at 10:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Jeanne Mell

OraSure Technologies, Inc. - VP of Corporate Communications

* Roberto E. Cuca

OraSure Technologies, Inc. - CFO & Principal Accounting Officer

* Stephen S. Tang

OraSure Technologies, Inc. - President, CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Brandon Couillard

Jefferies LLC, Research Division - Equity Analyst

* David Michael Westenberg

Guggenheim Securities, LLC, Research Division - Research Analyst

* John Hsu

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

* Mark Anthony Massaro

Canaccord Genuity Limited, Research Division - Senior Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Jeanne Mell, OraSure Technologies, Inc. - VP of Corporate Communications [1]

--------------------------------------------------------------------------------

Good afternoon, everyone, and welcome to the OraSure Technologies 2018 Fourth 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 2018 fourth quarter financial results and certain other matters. The press release is available on our website at www.orasure.com or by dialing (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, 2017, 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 this call.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Jeanne. Good afternoon, everyone, and welcome to our call. I'm delighted to report that 2018 was a financially successful and strategically important year for OraSure. We posted solid year-over-year organic revenue growth after coming off a record performance in 2017. We successfully managed the transition of senior management and completed an extensive and thorough review of our corporate strategy. The company wasted no time implementing that strategy as evidenced by the 2 acquisitions we announced a few weeks ago. OraSure is well positioned to compete in multiple markets with large growth opportunities, and we are highly optimistic about our future prospects.

Although some important aspects of what we accomplished in 2018 may not be evident in today's results, we believe they will become apparent in the coming years. We expect 2018 to be seen as a pivotal time in the company's history as our innovation growth strategy took flight, expanding our reach in molecular diagnostics and driving our business internationally.

Looking at our full year results, you will see solid growth in the areas we targeted and where we are investing. Importantly, as we endeavor to transform the composition of our top line, we did not lose focus on the bottom line and posted strong profitability. We believe we've identified select opportunities that will drive our next wave of growth.

For the full year 2018, our net revenues grew by a solid 9% over the prior year period and reached the highest level in our history. We also continued to deliver strong profitability. A major contributor was our OraQuick HIV international business, which grew by 93% for the year, primarily due to strong HIV Self-Test sales. Our molecular business also contributed with revenues up more than 15% for the full year. Our microbiome business continued an important trend in 2018 with revenues nearly doubling when compared to 2017. And finally, we ended the year in an extremely strong financial position with no debt and cash balances exceeding $200 million for the first time ever.

During the fourth quarter, our consolidated net income improved 41% from the prior year quarter. This strong bottom line performance was generated by a number of factors. International sales of our OraQuick HIV and HCV products rose 23% and 40%, respectively, compared with the fourth quarter of 2017. Although Q4 molecular collection revenues were down due to unusually high sales to our consumer genomics customers in the fourth quarter of 2017, driven by atypical ordering patterns, we saw strong growth elsewhere in both our genomics and microbiome businesses during the current quarter. We see this as a positive trend for the future of our molecular business.

Other revenues for the quarter rose almost 200% compared to Q4 of 2017 as a result of close to $5 million in royalty from a litigation settlement agreement. Our gross profit improved by more than 25% over the fourth quarter of 2017.

On the strategic front, we began aggressively implementing our innovation growth strategy. Following an intense period of due diligence and negotiation toward the end of 2018, we opened the new year by closing 2 strategic acquisitions, which will add new products and technologies and new market reach. We believe both companies will eventually become strong contributors to our business.

Strong financial results and important progress in executing against our long-term strategy were a great way to end 2018 and begin a new year. And with that, let me now turn the call over to Roberto for his financial review. I will then follow up on some of the key factors driving our business, and we'll open the call for your questions.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Steve, and good afternoon, everyone. Our fourth quarter net revenues decreased 3% to $50.2 million from $52.0 million recorded in the fourth quarter of 2017. Our net product revenues decreased 11% to $44.8 million compared to the prior year period. Our molecular net revenues, including royalty income, increased 2% to $30.2 million in the fourth quarter compared to $29.8 million in 2017. Royalty income was $4.8 million in the fourth quarter of 2018. No royalty income was recorded in 2017.

Molecular product revenues decreased 15% to $25.4 million in the fourth quarter of 2018 compared to $29.8 million in the fourth quarter of 2017. Sales of our genomic products declined 18% to $23.5 million, largely due to lower sales to a large consumer genomics customer. The primary reason for this is that sales for this customer in the fourth quarter of 2017 were unusually high as a result of unexpected consumer demand that occurred during that quarter.

Microbiome sales also expanded, growing 72% to $1.9 million in the fourth quarter of 2018 compared to the same period last year. International HIV sales increased 23% to $4.4 million from $3.6 million in the fourth quarter of 2017 due to higher sales of our OraQuick HIV Self-Test into Africa and increased sales of our professional product in Asia and Europe. Once again, a majority of our volume this quarter came from countries outside of the UNITAID, Population Services International, Self-Testing Africa or STAR initiative, demonstrating continuing growth of countrywide pilots and initiatives.

Tests shipped to African countries, both in and outside the STAR program during the quarter, were subject to support payments under our charitable support agreement with the Bill & Melinda Gates Foundation. Domestic HIV sales decreased 23% to $5.0 million in the fourth quarter of 2018 compared to $6.5 million in the fourth quarter of 2017, largely due to customer ordering patterns and other factors we've previously discussed.

International HCV sales in the fourth quarter of 2018 increased 40% to $1.6 million from $1.1 million in the same period of 2017, primarily due to continued growth in Asia and Africa. Domestic HCV sales decreased 16% in the fourth quarter of 2018 to $2.1 million from $2.5 million in the prior year, largely due to customer ordering patterns.

Other revenues were $578,000 in the current quarter compared to $1.8 million in the prior year. The decrease was largely due to a decrease in BARDA funding and cost reimbursement under our charitable support agreement with the Gates Foundation.

Gross profit percentage for the fourth quarter of 2018 was 69% compared to 55% reported for the fourth quarter of 2017. Gross profit percentage for the current quarter benefited from improved product mix, the increase in royalty income, lower manufacturing costs associated with our Oragene product, lower scrap and spoilage costs and lower royalty expense. Our operating expenses for the fourth quarter of 2018 were $22.2 million compared to $18.4 million in the comparable period of 2017.

Operating expense in the fourth quarter of 2018 included $1.2 million of transaction costs associated with our recent acquisitions and $973,000 of additional transition costs associated with executive management changes that occurred earlier in the year. Higher commissions and consulting and other staffing costs further contributed to the increase in operating expenses.

Income tax expense was $3.8 million in the fourth quarter of 2018 compared to $3.0 million in the same period last year and consists largely of Canadian taxes due and is reflective of the higher pretax earnings generated by our Canadian subsidiary. We reported net income of $10.3 million or $0.16 per share for the fourth quarter of 2018 compared to net income of $7.3 million or $0.12 per share for the fourth quarter of 2017.

We continue to maintain a solid cash and liquidity position. Our cash and investments balance at the end of 2018 was $201.3 million compared to $176.6 million at the end of 2017. Cash generated by operating activities during 2018 was $39.1 million compared to $28.2 million in the same period of 2017, which included $12.5 million in litigation settlement.

Turning to guidance for the first quarter of 2018. We are projecting revenues of $29.0 million to $30.5 million and net loss of $0.06 to $0.07 per share. This projection is largely driven by lower expected sales to a larger consumer genomics customer. As stated on prior calls, sales to this customer were unusually high in the fourth quarter of 2017 and moved to what appeared to be a more normal level in the fourth quarter of 2018 in response to seasonal retail promotional activity at the end of the year.

This large customer is now further changing its purchasing patterns and promotional strategies, which in turn is driving our guidance for the first quarter of this year. We only recently learned of their lower purchasing intentions, and although disappointing, we expect that the effect of these changes will be moderated over the course of the year by opportunistic growth in other genomics accounts. For that reason, we do not view the first quarter as an indication of the success we anticipate for the rest of 2019. Our expectation is that the second half of 2019 will deliver higher revenues than the first half, much as we have seen in 2017 and 2018. We are also confident in our ability to deliver profitability in 2019.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Roberto. Let's take a look at some of our key growth drivers. Our global HIV testing business delivered outstanding results in 2018, largely as a result of HIV Self-Test sales in the international marketplace. Fourth quarter self-testing volumes were up sequentially from the third quarter and total year volumes are up significantly over 2017. As Roberto noted, international HIV sales grew 23% in the fourth quarter and almost doubled for the full year when compared to 2017.

As you know, the HIV Self-Test business was jumpstarted by the Self-Test Africa or STAR program that Roberto mentioned. The market has evolved quite a bit since that program was first launched in 2015. During Q4, 64% of orders occurred outside of the STAR program and 58% of our self-test sales for all of 2018 were a result of non-STAR orders. This demonstrates significant positive momentum and growth for this business as the market continues to expand organically beyond the initial countries we serve when this product was first launched.

A key driver for HIV Self-Testing has been our charitable support agreement with the Gates Foundation targeting 50 countries in Sub-Saharan Africa, West Africa, Asia, Central Asia and Latin America. We continue to support new registrations in the countries covered by this agreement along with ongoing educational efforts to promote the attractive pricing we can offer, thanks to the Gates Foundation.

While demand for our self-test product can and likely will be a bit choppy on a quarter-by-quarter basis as countries develop their testing programs and understand ongoing demand needs, the overall trend for this business is very positive. We continue to believe the projections in the report issued by the World Health Organization and UNITAID on the global market for rapid HIV testing are directionally correct.

As you may recall, that report suggests that demand for self-test is expected to increase from about 1 million tests in 2017 to a range that averages out to 16 million tests annually by the end of 2020, with the high end of that range reaching just over 19 million tests annually. We believe the market conditions will continue to drive strong growth for HIV self-testing throughout 2019 and beyond.

Turning to our other main growth platform. Full year molecular collections revenue delivered a solid 15% growth rate over 2017. Although the contribution from our consumer genomics customers is changing when compared to prior years, this has not dampened the outlook for genomics or the overall prospects for our molecular business as evidenced by the fact that we acquired 56 new customers in Q4 and 332 for the whole year.

The genomics business saw revenue growth of 11% for the full year. Although customer genomics is and will continue to be an important part of the genomics business, we are also seeing growth in other areas of the genomics market. For example, 2018 saw renewed strength from academic customers with revenue growth reaching 16% for the full year. Our academic business continued to benefit from large epidemiological studies.

For example, clinical studies called My Personal Breast Screening project is testing 50,000 women for their individual risk of developing breast cancer and investigating whether mammography screening could be improved by personalized individual risk-based screening. The study is being financed by the European Union under the innovation Horizon 2020 program. It's being conducted by UniCare, which is a center for cancer prevention in France and the principal operator for academic cancer research in Europe

We also saw extraordinary growth from our ORAcollect business, particularly in the second half of the year with global revenues up more than 200% for both the fourth quarter and the full year 2018 when compared to '17. This was driven in part by one of our top 20 customers in Asia, who was using our ORAcollect test kit. We are encouraged by demand for our genomics business in Asia, where revenue from one of our top 3 customers grew 184% in Q4 and 175% for the full year when compared to 2017. Revenue from another top 20 customer in Asia increased by more than 450% in Q4 and by 500% for the year.

In the microbiome market, we delivered another record performance in 2017 (sic) [2018], with fourth quarter revenues up 72% and full year revenues up 92% compared with 2017. Again, we are seeing growth in Asia where microbiome revenues increased 72% in Q4 compared to Q3 and 62% compared to the fourth quarter of 2017. Similarly, microbiome revenues in Europe increased 191% sequentially in Q4 and 221% compared to Q4 in 2017. One of our top microbiome customers is starting a Phase II clinical trial and has signed a microbiome service contract to be executed in 2019.

During the fourth quarter, we've signed 5 new pharma and 1 new direct-to-consumer, or DTC, customer in the microbiome space. One example of a new DTC customer for whom we're providing both kits and services is Onegevity Health, a top consumer health intelligence company that combines a multiomic artificial intelligence platform with consumer-friendly products and services focused on personalized health and wellness.

So stepping back to look at the bigger picture, our molecular business is becoming broader and showing good strength beyond 1 or 2 large customers. The list of our top 20 molecular customers reveals some interesting trends. 18 of our top 20 molecular accounts drove higher sales for the most recent 12-month trailing period compared to the prior period, with 17 showing double- or triple-digit revenue growth rates.

For the first time, 2 microbiome customers are now in the top 20 and a new academic customer also joined the top 20 list. 2 of our top 20 customers are located in Asia and one of these customers is in the top 3. 7 of our top 20 customers are currently under multiyear supply agreements. Half of our top 20 customers use our customization services.

Finally, one of our top 10 customers provides direct-to-consumer canine testing services and claims Oprah as a fan. In fact, she put it on her list of her favorite things for 2017. These statistics point to the growing strength and diversity of our molecular business.

I also want to touch on our mergers and acquisition activity, in particular, our recent acquisitions of CoreBiome and Novosanis. Starting with CoreBiome. We are very excited to have this company on board. This is exactly the type of transaction that we seek to target as it broadens our reach in molecular and meets our innovation criteria. CoreBiome is a Minnesota-based microbiome service provider spun out of the University of Minnesota. It was founded by 3 leading domain experts in microbiome informatics, genomics methods and clinical lab operations.

CoreBiome's proprietary technology provides fast, information-rich characterizations of the microbiome diversity and its function and pairs that information with machine learning and expert analytics. This acquisition positions OraSure to become a leading end-to-end solutions provider for researchers, direct-to-consumer companies and therapeutics and diagnostic development customers, covering everything from sample collection to delivery of a final analysis. This is an important part of our innovation growth strategy.

We expect to see powerful synergy by combining CoreBiome's platform with the proprietary sampling and stabilization technology and deeper sales and marketing resources of our subsidiary, DNA Genotek. We are enthusiastic about this addition to our evolving multiomics business. We hope that this acquisition will look prescient in a few years as we expect the microbiome market to continue to post strong growth for the years to come.

Novosanis was also spun out of a university setting, this time in Belgium, with technology coming out of the University of Antwerp. Novosanis expands our collection capabilities into the urine market and also broadens our addressable markets. This primary technology called Colli-Pee is the only available easy-to-use device suited for standardized volumetric collection of first-void urine in the privacy of the user's home or at a clinic.

We believe the Colli-Pee product line offers important competitive advantages for urine testing with the first applications in the liquid biopsy market for prostate and bladder cancers as well as sexually transmitted infections. Novosanis expands our product portfolio and advances our expertise in the noninvasive sample collection and stabilization landscape.

Together, these acquisitions support our efforts to expand even deeper into the multiomics and systems biology arenas. Both companies were relatively low cost, tuck-in type acquisitions for our molecular business. We are making good progress with our integration activities as we leverage the strength from both organizations.

And we're already seeing new customer contracts generated by both companies. We're excited to combine the broader resources of the OraSure sales, operations and research organizations to supplement the innovative new technologies developed by these important additions to the OraSure family. I cannot emphasize enough that these acquisitions represent clear progress as we execute our innovation growth strategy and supplement our core business with focused strategic acquisitions. These transactions are the first steps in what we expect to be a broader and ongoing growth story, so please stay tuned.

In closing, I want to thank all those at the company who made 2018 such a success. We accomplished a great deal but our work to implement our innovating and growth strategy has just begun. If you listen to our presentation recently at the JPMorgan conference, you may recall the discussion of a relatively little-known topic to many that is multiomics.

Genomics was the first frontier, microbiome is the next and multiomics is the emerging frontier, where science provides further insights beyond proteomics and metabolomics as our best view of how the human body responds to our genes and environment. Multiomics provides thorough multifactorial examination of health. This area is still largely in its infancy where we want to take an early leadership position to capture the large sample collection and testing opportunities we anticipate in the years to come.

As you've heard today, we're building on our core strengths in the areas of innovation tools and services to expand even deeper into the multiomics and systems biology arena. Multiomics requires the ability to analyze and interpret massive data sets to extrapolate a [comprehensive] view of health and well-being. By examining the -omes, the genome, the proteome, transcriptome, epigenome and the microbiome, we can assess all aspects of what's in us, what's on us and to inform our health.

Broadly speaking, the markets we serve aim to understand the continuum of wellness through disease by profiling well-characterized patient populations with molecular techniques. Genomics has been hugely informative to this setting so when you [exhume] out, you quickly realize that our 23,000 genes encode only a small fraction of our biochemical potential. Microbes, which colonize us inside and out, collectively encode 10x more genetic and functional potential. Only recently has the scientific community developed the computational tools to harness the relatively new branch of multiomics.

Technological advances have enabled the study of physiological and cellular changes at different molecular levels. Multiomics lets us integrate data from large populations to potentially impact prevention, improve diagnostics and more effectively treat complex disease such as cancer and diabetes. The potential of this multiomics approach is demonstrated by the fact that 40% of our microbiome customers were or are customers of our genomic product lines.

We are well positioned to capitalize on opportunities across multiple sample types and analytes and from existing ORAgene and OMNIgene customers as they expand their research offerings to incorporate more aspects of health through systems biology.

We also believe there will be continued strong growth from our HIV Self-Test business and we're optimistic that there's additional [potential] for our OraQuick HCV product line. And as we recently demonstrated, our strong balance sheet will enable us to continue to execute on our long-term growth strategy in very concrete ways by acquiring new products and technology. I'm confident our strategy is on target, and I look forward to updating you on our progress as we move through the new year.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question comes from Mark Massaro with Canaccord Genuity.

--------------------------------------------------------------------------------

Mark Anthony Massaro, Canaccord Genuity Limited, Research Division - Senior Analyst [2]

--------------------------------------------------------------------------------

Yes, the first one is on the Q1 revenue guidance. And I know historically, you've talked about how you do have visibility to ordering patterns with your customers. I think -- I don't want to put words in your mouth, but my understanding it's roughly a 3-month or so visibility to ordering. So I also know in your prepared remarks, you talked about how you only recently found out about the large customer. So I guess, can you give us a sense of when exactly you found out and whether or not you think that you have 3 or more months of visibility going forward?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks for the question, Mark. Yes, so we found out in the last couple of weeks, so after the conference in which -- many of us attended in San Francisco. So there were discussions with this customer at the end of last year about how they wanted to order for last year and this year. So notwithstanding that there is an ability to use firm orders, there were some flexibility in the recent discussions with this customer that is different from the way it typically is. So for this particular quarter, they told us later into the quarter than they normally would what they wanted to do with the final matter. So it was a bit of a surprise for us and consequently a disappointment. But as we said in the guidance discussion, we do expect that once other market -- once other consumer genomics market participants understand the change of this customer's approach to the market, they'll step in and begin promoting and discounting more aggressively and pick up some of the slack. One of the -- I think one of the important points to note here is that because this is one of our largest customers, it's one of the ones that gets some of the best pricing. And so as volume is replaced from other competitors, it's likely that we'll be seeing better gross margin percentage from those replacement orders.

--------------------------------------------------------------------------------

Mark Anthony Massaro, Canaccord Genuity Limited, Research Division - Senior Analyst [4]

--------------------------------------------------------------------------------

Got it. And as it relates to that large customer, are you holding flat on pricing with that large customer? I guess, I would think that this is the same customer you have the long-term supply agreement with. So has there been any change -- the prepared remarks talked about lower purchasing intentions, which I would assume to be volume but is there any change in price?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

There's no change in price.

--------------------------------------------------------------------------------

Mark Anthony Massaro, Canaccord Genuity Limited, Research Division - Senior Analyst [6]

--------------------------------------------------------------------------------

Okay. And is there any way you can -- I guess, as a follow-up, are you aware of why the volumes are expected to be lower other than the large customer indicated so? Just curious if you know the specific reason but just cannot disclose it.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

We do know the specific reason and we cannot disclose it. But I think that as a market dynamic, this segment, direct-to-consumer is largely driven, Mark, as you know, by promotion and advertising. And so I think they've made certain decisions about that.

--------------------------------------------------------------------------------

Mark Anthony Massaro, Canaccord Genuity Limited, Research Division - Senior Analyst [8]

--------------------------------------------------------------------------------

Yes, perfect. And then is there any way you could give a sense on the revenue split? I know, for instance, Illumina talked about certain percentage second half of the year being, I think, it was 53%. I know -- so I'm curious, obviously, you expect the second half of the year to pick up, but can you give us a sense of the magnitude on a percentage of revenue basis?

--------------------------------------------------------------------------------

Roberto E. Cuca, OraSure Technologies, Inc. - CFO & Principal Accounting Officer [9]

--------------------------------------------------------------------------------

So we're not providing full year guidance. That said, as we said in the prepared remarks, we do expect the second half to be greater than the first half. We do also expect that competitors of our largest customer will step in and capture additional share and units. One of the challenges for us is that depending on which customers those are, that hits our revenue line in different ways. So as you know, there's a not quite customer that pays us a royalty at a rate that was more like a net profit rate than a typical revenue rate. So depending on how the incremental share capture breaks down between different market participants, we could have different effects on our top line. So we do have some expectations around what we'll see for the full year. We do want to see some additional activity and actuals from the market participants before we firm that up and share that more broadly with investors.

--------------------------------------------------------------------------------

Mark Anthony Massaro, Canaccord Genuity Limited, Research Division - Senior Analyst [10]

--------------------------------------------------------------------------------

Okay. And just as a clarification, this customer is changing their ordering patterns. They're not coming off the market or anything in Q1, are they? Or just lowering their ordering this quarter?

--------------------------------------------------------------------------------

Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [11]

--------------------------------------------------------------------------------

They are not coming off the market.

--------------------------------------------------------------------------------

Mark Anthony Massaro, Canaccord Genuity Limited, Research Division - Senior Analyst [12]

--------------------------------------------------------------------------------

Okay. Last question for me. Can you speak about the potential opportunities in hepatitis C eradication OUS and whether or not you're still having conversations there?

--------------------------------------------------------------------------------

Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [13]

--------------------------------------------------------------------------------

We are still having conversations. I think I've noted in previous calls, Mark, that there's been renewed interest in country-by-country eradication programs, particularly where there's a high prevalence in hepatitis C. What's lacking just structurally is funding along the same magnitude that we have seen for HIV eradication, which, of course, has benefited our Self-Test. So I think there are very similar dynamics in the marketplace, and of course, hepatitis C is a much bigger challenge from a public health perspective than HIV is because of the infection rates but it also benefits from the fact that there's a cure. So we still like the prospects of widespread HCV eradication and we're working it country by country, but we're also trying to engage funders in this discussion as well, particularly funders who have participated in the success of HIV eradication as we have.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

Our next question is from Brandon Couillard with Jefferies.

--------------------------------------------------------------------------------

Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [15]

--------------------------------------------------------------------------------

Could you elaborate a little more on just what specifically is changing with this large genomics customer in terms of their ordering patterns? And why do you necessarily expect that to moderate as you move through the year? And then could you remind us, do you actually have annual minimums from this large customer?

--------------------------------------------------------------------------------

Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [16]

--------------------------------------------------------------------------------

We do have annual minimums from this one [large] customer. As we look ahead to the prospects for the entire year of 2019, we are being conservative with our estimates for this customer. And I think what we've alluded to in the prepared remarks is that we believe that there will be an uptick in other players in this portion of the industry to gain market share. And so we had not quantified that for outside purposes, but we certainly have for internal purposes.

--------------------------------------------------------------------------------

Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [17]

--------------------------------------------------------------------------------

Okay. And then any chance you'd be willing to share with us some goalposts for the year as you think about the molecular collection business? I mean, would you expect that unit to actually show growth this year sort of net of the acquisitions? And you kind of referred to the core business and acquisitions supporting return to growth in the future periods. Does that suggest a year-over-year growth perhaps in the back half of this year?

--------------------------------------------------------------------------------

Roberto E. Cuca, OraSure Technologies, Inc. - CFO & Principal Accounting Officer [18]

--------------------------------------------------------------------------------

So we're not providing full year guidance right now. I do understand though the interest in this question. And I'll return to a comment that I said earlier in response to a prior question, which is that we have reasons to believe that much of the volume that is going out of the first quarter of this year will be picked up by competitors over the course of the year. I think some of those competitors may not yet be aware of what this change is and how it's affecting the market and so have not yet primed themselves to pick up additional volume. Also, we iterate what I said earlier, which is that depending on which of those competitors pick up that volume, it appears on our revenue line in different ways and at different rates. So until we have a better handle on exactly what the likelihood is of, in particular, individual competitors stepping up, it's harder for us to make a prediction. But from a volume perspective, given that we do expect that there will be this re-inflow into the [market], we don't expect that there will be substantial adverse volume effect.

--------------------------------------------------------------------------------

Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [19]

--------------------------------------------------------------------------------

Okay. And then one more, just on the OUS HIV business. That business more than doubled through the first 3 quarters of the year. Seemed to slow to, like, 23% growth in the fourth quarter. Could you just speak to the deceleration there and kind of what your first quarter outlook takes into account for OUS HIV?

--------------------------------------------------------------------------------

Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [20]

--------------------------------------------------------------------------------

So Brandon, in general terms, I would not read anything into the fourth quarter performance versus the entire year. I think as I alluded to in my remarks, it will be a bit choppy for HIV Self-Test. And that's based on the countries getting traction with their HIV eradication efforts and understanding ordering patterns on their own. So we have to address this on a country-by-country basis, and that's why we're not concerned about the unevenness quarter by quarter.

--------------------------------------------------------------------------------

Roberto E. Cuca, OraSure Technologies, Inc. - CFO & Principal Accounting Officer [21]

--------------------------------------------------------------------------------

And because those orders tend to be smaller numbers of orders in larger volumes, an order lagging over from one quarter to another can make a change in cadence that appears to be meaningful, but really isn't.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

Our next question comes from John Hsu with Raymond James.

--------------------------------------------------------------------------------

John Hsu, Raymond James & Associates, Inc., Research Division - Research Analyst [23]

--------------------------------------------------------------------------------

Maybe if we could start, just again if we go to the 1Q guide, it looks like obviously around $14 million or so, kind below what the Street was looking for. And again, I just want to kind of understand that your expectations for genomics is primarily the major delta for maybe what we were expecting for that business. Again, just want to try to get a better understanding of what exactly you're seeing as far as the 1Q maybe versus where the Street was sitting.

--------------------------------------------------------------------------------

Roberto E. Cuca, OraSure Technologies, Inc. - CFO & Principal Accounting Officer [24]

--------------------------------------------------------------------------------

Sure. So you're correct that genomics and consumer genomics, and in particular, that one individual customer of ours is the major driver of that variance between the expectations and the guidance that we provided. We believe that the general consumer genomics market is not yet aware of this change and this large participant's approach to the market. But that as competitors do understand it and understand the opportunity to gain share, they will step up and take that additional share, which is what we mean by the effect of this moderating over the course of the year.

--------------------------------------------------------------------------------

John Hsu, Raymond James & Associates, Inc., Research Division - Research Analyst [25]

--------------------------------------------------------------------------------

Okay, great. That's helpful. And then maybe if you could just help us understand that second dynamic, as other competitors step in on the consumer genomics side, whether it's -- if you could frame maybe the top 10 or top 25 companies, how many of those are your customers currently in one form or fashion?

--------------------------------------------------------------------------------

Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [26]

--------------------------------------------------------------------------------

So I think the best way to answer that, John, is our track record of customer acquisition. And I think we reported that in our molecular -- overall molecular business, we acquired 332 new customers in 2018. So that's almost a customer a day. So the dynamic that I think we're seeing in the marketplace is that there continues to be new entrants into the marketplace and there are, I think, fairly low barriers of entry for those entrants. But the more important thing to us is how they grow as customers in our top 20. And so I reported information that said 18 of our top 20 customers are growing by either double or triple-digit rates. So if you know probably from last quarter, I said 19 out of the 20, and so obviously one of those fell out, and that's the customer that had the unusual ordering patterns that we've been talking about. So there is some concentration at the top of our large customer base, but I think that we have great prospects in diversifying our overall customer base so that we don't have the exposure we had right now to the actions of one customer. So if we had seen, let's say, decreases in new customer acquisition or decreases in our top 20 customers' growth rates, we would be concerned, but we don't see that at all. And in fact, I think we see this market expanding and growing not only domestically, but as I reported in my remarks, in Asia and Europe as well. So there have been, I think, other reports have indicated that there's very low penetration, perhaps 1% of all humans have had their genome sequenced. And so the upside is still quite remarkable overall. And I think that we, as an industry participant, share those of our peers in the industry in seeing this market sector very optimistically.

--------------------------------------------------------------------------------

John Hsu, Raymond James & Associates, Inc., Research Division - Research Analyst [27]

--------------------------------------------------------------------------------

Okay, great. That's very, very helpful, Stephen. Last one if I could. Just it looks like there's -- you made a little bit of change to some of the reporting segments. Specifically, the one I'm focusing in on, the commercial and academic breakdown for genomics. It looks like that's no longer being reported separately. So kind of why make that change now rather than starting clean for fiscal '19?

--------------------------------------------------------------------------------

Roberto E. Cuca, OraSure Technologies, Inc. - CFO & Principal Accounting Officer [28]

--------------------------------------------------------------------------------

We just decided to move forward to use that as the base for the full year of 2019. So the K is a difficult time to make those sort of changes so we went ahead and made it.

--------------------------------------------------------------------------------

Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [29]

--------------------------------------------------------------------------------

John, you may have noted in the remarks, though, that the academic sector among molecular was up, I think, 16% year-on-year so we are tracking it as one of our growth drivers.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

Our next question comes from David Westenberg with Guggenheim.

--------------------------------------------------------------------------------

David Michael Westenberg, Guggenheim Securities, LLC, Research Division - Research Analyst [31]

--------------------------------------------------------------------------------

So I know I'm asking the exact same question as John, but I'm going to do it in a little bit of a more direct way. So your $14 million, $15 million below guidance for Q1, I know that molecular collections customer is probably not a $15 million order. So somewhere in there, there's a mix relative to expectations even different than, say, that one molecular customer. So I know you can't predict what -- kind of what everybody's model is doing on the sell side but if there's any other areas to focus on where it might have also been a little bit below expectations for you, that would be helpful.

--------------------------------------------------------------------------------

Roberto E. Cuca, OraSure Technologies, Inc. - CFO & Principal Accounting Officer [32]

--------------------------------------------------------------------------------

Sure. So that customer -- so if you think back to some of the discussions that we've been having with investors regarding the cadence of quarters in the past, call it, 1.5 years, so we've pointed out that the fourth quarter of '17 was a very -- a highly -- unusually high quarter, that it certainly grew from the third quarter of '17 and that one would typically expect to see more evenness between the third and fourth quarter, more similar to what you saw this year. We've also made the point that ending the fourth quarter of 2017, a couple of customers, including potentially that large customer, may have had larger numbers of units on hand in inventories than they otherwise typically would have and that would have had the effect of drawing from the first quarter of '18. So if you correct for those and take a look at what the first quarter of '18 could have looked like and what that customer might have represented for that, it really isn't that far off from the $14 million by which our first quarter guidance differed from expectations. There are some other dribs and drabs, but they really are a (inaudible) of the difference between what the Street was expecting and what we've guided to.

--------------------------------------------------------------------------------

David Michael Westenberg, Guggenheim Securities, LLC, Research Division - Research Analyst [33]

--------------------------------------------------------------------------------

Okay. And most of my questions have been answered, so I'll just ask here one really short one here. Did any of your customers in the molecular collection business mention anything about stocking in Q4? Or is this kind of just normal ordering pattern in Q4?

--------------------------------------------------------------------------------

Roberto E. Cuca, OraSure Technologies, Inc. - CFO & Principal Accounting Officer [34]

--------------------------------------------------------------------------------

We don't have visibility into their stocking. We do have one-off discussions about inventory when we discuss planning for a production for their -- to fulfill their orders. But we don't have any widespread visibility into their stocking nor have we heard anything in those more informal discussions that reflect any sort of unusual stocking or destocking patterns.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

And we have a follow-up from Mark Massaro with Canaccord Genuity.

--------------------------------------------------------------------------------

Mark Anthony Massaro, Canaccord Genuity Limited, Research Division - Senior Analyst [36]

--------------------------------------------------------------------------------

I don't think you mentioned All of Us, the U.S.-based POPSEQ initiative. So I attended a conference recently where there was a pretty bullish update about the number of people that have already been enrolled. So can you just talk about All of Us being a potential opportunity for you and then maybe any other population sequencing initiatives around the world would be helpful.

--------------------------------------------------------------------------------

Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [37]

--------------------------------------------------------------------------------

Yes, so these fall in the category of large epidemiological studies and many of them are public. We are participating right now in -- of the 50 that we're aware of, 10 of them. We've had a small role in All of Us, I think, as we've shared previously. I think what we're seeing here is that many of these studies start with blood collection and then they realize that there are inherent challenges of drawing blood so that means that enrollment is slower. And so then we'll take a look at saliva -- self-collected saliva as a noninvasive way to -- people to sample their own DNA. And that gives them the kind of access that they need. So we are in the hunt in all these studies for that very reason. I think we can point in particular, there's -- there was coverage of the Million Veteran Program, which is a study that they're considering not only enrolling veterans into the project but, like All of Us, are also considering giving the participants their data back. And of course, if they have to do that, then they would need a Class II-cleared FDA device similar to our Oragene Dx or ORAcollect Dx products. So that gives us a competitive advantage beyond just the saliva if they're going to provide test results right back to the participants or the patients. So this is -- it remains, I think, a fruitful area for us in an area that we are very highly focused on, Mark.

--------------------------------------------------------------------------------

Mark Anthony Massaro, Canaccord Genuity Limited, Research Division - Senior Analyst [38]

--------------------------------------------------------------------------------

Great. And then the acquisitions that you made recently, should we still think of a $4 million to $7 million bump to revenues in 2019? And can you talk about your expectations for growth in those segments going forward?

--------------------------------------------------------------------------------

Roberto E. Cuca, OraSure Technologies, Inc. - CFO & Principal Accounting Officer [39]

--------------------------------------------------------------------------------

Sure, so we have not changed our expectations for how those 2 businesses will contribute to our top line. We haven't said anything specific about the longer-term growth expectations for them. But what we have said is that they're consistent with our overall strategy, which is to be a revenue growth company, i.e., growth in the double digits. And those businesses, we do expect to contribute to that strategy.

--------------------------------------------------------------------------------

Mark Anthony Massaro, Canaccord Genuity Limited, Research Division - Senior Analyst [40]

--------------------------------------------------------------------------------

Excellent. And last one for me. Obviously, it's pretty clear that you're not providing full year guidance. Do you think that you may be getting closer to providing full year guidance in aggregate? And then as a follow-up to that, given the lumpiness going on in molecular collections, should we think of a time in the future where we might be able to get a segment guide in that particular unit when things settle down with the large customer?

--------------------------------------------------------------------------------

Roberto E. Cuca, OraSure Technologies, Inc. - CFO & Principal Accounting Officer [41]

--------------------------------------------------------------------------------

Yes, so I think you correctly identified what the sensitivities are to us regarding full year guidance. We have heard from many of our investors how useful that would be and have been evaluating that carefully. You can imagine that this disruption that we learned just recently would have made it difficult for us at this point to begin the full year guidance. But that doesn't mean that we won't at some future point, nor does it mean that we will wait for the beginning of the year necessarily to institute full year guidance. We also understand that there's significant value to investors to understand how revenues break down between the 2 business units. And so to the extent we can provide useful guidance with respect to that detail, we'd certainly consider doing that.

--------------------------------------------------------------------------------

Mark Anthony Massaro, Canaccord Genuity Limited, Research Division - Senior Analyst [42]

--------------------------------------------------------------------------------

Perfect. And I know this is a difficult question, but do you think your business is set up to achieve double-digit top line growth in the next 3 years?

--------------------------------------------------------------------------------

Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [43]

--------------------------------------------------------------------------------

Well, we certainly have characterized ourselves intentionally as an innovation growth company, Mark. And I think that means implicitly that we intend to grow at faster rates than our market segments. And I think as you're well aware of, we are in part a diagnostic company and in part a life science tool company. And so I think you have to look at the blended rate of those market sectors and then calculate that we intend to grow at or above that rate. So we certainly would love to grow at double-digit rates but that highly depends on how the sectors are growing as well.

--------------------------------------------------------------------------------

Operator [44]

--------------------------------------------------------------------------------

That brings to an end the question-and-answer session of today's call. I will now turn the call over to Dr. Tang for closing remarks.

--------------------------------------------------------------------------------

Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [45]

--------------------------------------------------------------------------------

We thank you all for participating in today's call and for your continued interest in OraSure. Have a good afternoon and evening.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.