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Edited Transcript of OSUR.OQ earnings conference call or presentation 4-Nov-20 10:00pm GMT

·44 min read

Q3 2020 OraSure Technologies Inc Earnings Call BETHLEHEM Nov 5, 2020 (Thomson StreetEvents) -- Edited Transcript of OraSure Technologies Inc earnings conference call or presentation Wednesday, November 4, 2020 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 ================================================================================ * Andrew Harris Cooper Raymond James & Associates, Inc., Research Division - Senior Research Associate * Casey Rene Woodring JPMorgan Chase & Co, Research Division - Research Analyst * Frank James Takkinen Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst * Jacob K. Johnson Stephens Inc., Research Division - Analyst * Patrick Bernard Donnelly Citigroup Inc. Exchange Research - Research Analyst * Vijay Muniyappa Kumar Evercore ISI Institutional Equities, Research Division - MD ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon, everyone, and welcome to the OraSure Technologies 2020 Third Quarter Financial Results Conference Call and Simultaneous Webcast. As a reminder, today's conference is being recorded. (Operator Instructions) I would turn the call over to Jeanne Mell, Vice President of Corporate Communications for OraSure. Jeanne? -------------------------------------------------------------------------------- Jeanne Mell, OraSure Technologies, Inc. - VP of Corporate Communications [2] -------------------------------------------------------------------------------- Thank you, operator. 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 note 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 strategy. 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, 2019, 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. With that, I will turn the call over to Dr. Stephen Tang. -------------------------------------------------------------------------------- Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Jeanne, and thank you, everyone, for joining us today. I know last night was a late night for many. So I appreciate your attention and interest this afternoon. I hope you and your families are faring well during these challenging times. As you will hear today, OraSure had a strong quarter. Our molecular sample collection devices are widely used for lab-based COVID-19 molecular tests. We've submitted our lab-based oral fluid SARS-CoV-2 antibody test to the FDA for emergency use authorization, or EUA, and we expect a rapid coronavirus antigen test to be ready for EUA submission in Q1 2021. Overall, our ability to address the COVID-19 pandemic through sample collection has contributed positively to our business in the third quarter. We generated $48 million revenue this quarter, a 33% increase over the prior year. This performance was driven by our Molecular Solutions business unit. Our products continue to be in demand as the need for COVID-19 testing continues to rise. The Molecular Solutions business unit generated $18.4 million in COVID-19-related sales in Q3, which is more than double the COVID-19 revenue achieved in the first half of the year. Globally, we're seeing what appears to be the third wave of the pandemic as the number of COVID-19 cases surges here in the U.S. and around the world. COVID-19 forecasts are not completely in alignment, but most predict that the current impact will be felt for another year or 2 years with COVID-19 existing at some level in perpetuity as the disease becomes endemic. While there is hope that a vaccine will be approved by year-end or early 2021, we expect it will take quite some time for a vaccine to be broadly available in the U.S. and internationally. And until then and beyond, testing will continue to play a critical role in managing the pandemic. We expect OraSure to continue to play an important and growing role to address the massive and persistent need for COVID-19 testing and sample collection. During our Q2 earnings call, I cited an estimate from the Rockefeller Foundation that call for 1.5 billion COVID-19 tests per year to get the pandemic under control. Since then, the foundation has increased its estimate to approximately 2.3 billion tests per year in the U.S. alone. With this in mind, we expect there will continue to be strong demand for COVID-19 testing for the foreseeable future. And we are prepared to help meet that need with our innovative solutions for testing and sample collection. All of OraSure's COVID-19 products are centered on the easy subcollection of samples by individuals, an area which we have long experience. Our products are designed to make it easier to obtain results either through oral fluid sample collection for PCR and antibody testing or through a full diagnostic test that consumers can conduct on their own. I'd like to address our current COVID-19 innovations, beginning with sample collection for molecular or PCR testing, which is the gold standard when it comes to detecting active COVID-19 infection. Our experience in innovating devices to facilitate at-home self-collection of samples has led to significant interest in our collection devices for molecular COVID-19 testing. Devices made by our DNA Genotek subsidiary support both PCR and sequencing-based COVID-19 tests. And these collection kits are now being used for collection at home by consumers or by laboratory staff and health care providers. Notably, 2 of our sample collection devices, ORAcollect RNA and OMNIgene Oral, received EUAs from the FDA in October. Both EUAs allow for the collection, stabilization and transport of saliva specimens suspected containing SARS-CoV-2 RNA. The authorization also allows the products to be used as a component of an authorized or cleared subcollection kit for unsupervised home use. This means the devices can be part of a kit that is authorized under its own EUA for the use of an individual to collect saliva specimens at home. It's important to note that these devices are not COVID tests. They are components of test that would be run in a lab. DNA Genotek's customers, which are typically laboratories offering COVID-19 test pipeline, would use devices as a sample saliva [selection] collection method for their lab-based COVID-19 tests. OMNIgene Oral and ORAcollect RNA are 2 of 3 molecular test collection kits that have been included in 6 EUAs DNA Genotek customers obtained from the FDA. But the EUAs are only one part of the molecular success story. About half of the third quarter sales of molecular sample collection devices for COVID applications were to customers not currently holding EUAs, with the balance of customers operating their COVID tests as laboratory-developed tests or LDTs. Use of DNA Genotek collection kits continues to grow in back-to-work settings, back-to-school programs and laboratory testing. For example, 30,000 students were tested at the University of Kansas before returning to campus using kits from Clinical Reference Laboratory. And 64 state University of New York campuses are testing students and employees with tests developed by Quadrant Biosciences. Our Oragene Dx saliva collection device is available at Albertsons Companies pharmacies throughout the U.S. as part of Phosphorus Diagnostics' COVID-19 testing program. And back-to-work programs are integrating COVID-19 testing, monitoring, assessment and access to telemedicine visits for companies through Azova, Inc. Additionally, Costco was selling COVID-19 saliva collection kits in conjunction with P23 Labs, which received an FDA EUA for the laboratory test workflows with their PCR test. The workflow includes OMNIgene Oral as a saliva collection device. Easy self-collection samples is essential to ensuring the safety of workers and students and their families by helping to curtail the spread of the virus as people resume normal aspects of life. We expect the sales of molecular collection kits for COVID-19 testing to continue to grow within the U.S. with existing and new customers, but also outside the U.S. as other nations complete their validation work around saliva as a sample type. Moving on to antibody testing. We have submitted an EUA application to the FDA for our oral fluid SARS-CoV-2 Antibody ELISA and are in the review process. To date, there are no oral fluid antibody tests for COVID-19 authorized for sale in the U.S. Pending receipt of an EUA from the FDA, we have the potential to be the first. This saliva-based oral fluid test is intended for the qualitative detection of total antibodies to SARS-CoV-2. We have a number of interested customers and are prepared to commercialize our antibody test in the fourth quarter of this year subject to receipt of the EUA. Oral sample collection is quick, painless, non-invasive and requires less human contact in comparison to blood draw, both minimizing the need for personal protective equipment, or PPE, and reducing exposure to potentially infected patients. With OraSure's tests, individuals would use a collection pad to self-collect an oral fluid sample under the direction of a health care professional. The sample will then be placed in the OraSure oral antibody collection device buffer for storage and transport. The sample would later be dispensed onto our proprietary ELISA microplate for analysis in a commercial laboratory to determine the presence of antibodies in the oral fluid sample. Potential locations for sample collection include physician's offices, labs, testing facilities and drive-through testing sites. We are evaluating whether the EUA subsequently could be amended to permit an unsupervised in-home sample collection option with the sample sent to a central laboratory for testing. At an epidemiological level, it is extremely important for public health officials to have an accurate understanding of who's been infected. Antibody tests are well suited for community surveillance and seroprevalence studies as they can help identify people in a population or a community that have mounted antibodies against COVID-19. According to the Centers for Disease Control and Prevention, CDC, this information could be used to estimate the number of people who have been previously infected with SARS-CoV-2 and were not included in official case counts. This is critical to maintaining an accurate count of infection rates and in forming decisions that can advance public health. Antibody tests could also potentially complement vaccine development and implementation. Turning to our antigen test. OraSure continues to make tangible progress in the development of our OraQuick Coronavirus Rapid Antigen Self-Test. Subject to receipt of an EUA, this product would test for active COVID-19 infection using nasal samples self-collected from the lower nostril. Results would be available at the point of collection with no instrumentation needed to interpret results. To date, there are no self-test authorized in the U.S. that enable individuals to test themselves and read the results at the point of collection with no instrumentation needed. We are highly confident that we can bring to market an accurate test and meets FDA standards for a rapid self-test. And as we disclosed previously, we intend to sequentially introduce our antigen test for 3 different uses, subject to regulatory authorization. First, a professional test for use at drive-thru sites, physician offices, public health testing sites and employer and university health centers. In this instance, a physician would prescribe the test and the patient would conduct a self-swab in the presence of a health care provider, who would then interpret the results. Second, a prescription self-test for use by individual consumers, which could be offered by employers or universities on or off-site or by physicians or public health authorities via remote testing or telemedicine. In this instance, a physician will prescribe the test and the consumer would conduct the self-swab at home or any location, where they would then interpret their own results. Thirdly, an over-the-counter, or OTC, self-test for use by consumers who would purchase online or at retail without prescription would conduct the test and receive the results themselves anytime, anywhere. We expect to file for the professional test EUA in Q1 2021 and the prescription self-test and OTC self-test EUAs to follow as soon as possible thereafter. This is a complex process that cannot be rushed. Between now and the filing of the EUA application, we will finalize the device design and complete the EUA studies necessary to determine the achievement of the high-performance standards that the FDA demands of a self-test. We are committed to delivering a rapid antigen self-test that meets FDA requirements for self-tests and the needs of the pandemic as well as our own rigorous standards for quality and performance. We have made a great amount of progress and completed important benchmarks. Limits of detection studies were conducted with live coronavirus at a certified third-party laboratory to evaluate the analytical sensitivity in comparison to an EUA-authorized, instrument-free rapid antigen test. The results from the comparison provided further confidence that the proprietary chemistries incorporated in OraSure's lateral flow test strip will deliver the sensitivity needed. In addition, the company currently has prototypes on the OraQuick platform under evaluation at clinical testing locations, continually providing data on the performance of the design against FDA requirements. Based on what we know at this time, we believe there will be significant demand for our antigen test self-test in 2021 as it puts control of the process in the hands of the user. In the U.S. alone, the Rockefeller Foundation estimates demand at approximately 2.3 billion tests annually. The Rockefeller Foundation and others have identified fast and frequent testing as a key to getting COVID-19 under control. This is exactly what our antigen tests will deliver. The timing of the EUA is subject to FDA review. Once EUA is obtained, we are prepared to launch the test without delay. Moving on to manufacturing. Early on in this pandemic, we understood that increasing our manufacturing capacity would be key. To that end, we are confirming that our plans to increase manufacturing capacity to meet demand for COVID-19 sample collection kits and test continues on track as outlined last quarter. With that, I'll hand it over to Roberto for a report on the quarter's financials. Roberto? -------------------------------------------------------------------------------- Roberto E. Cuca, OraSure Technologies, Inc. - CFO & Principal Accounting Officer [4] -------------------------------------------------------------------------------- Thanks, Steve. As Steve mentioned earlier, our third quarter net revenues increased 33% to $48 million from the $36 million reported in the third quarter of 2019, primarily as a result of strong sales of molecular sample collection kits for COVID-19 testing, increased international sales of the company's HIV self-test and higher laboratory services revenues, partially offset by lower sales across all of our other product lines, primarily due to the impact of the COVID-19 pandemic. Net product and service revenues were $46.7 million, a 32% increase from the third quarter of 2019. Total product and services revenues for the company's molecular business unit were $31.2 million during the third quarter of 2020, an increase of 79% from the third quarter of 2019. This increase included $18.4 million in sales of oral food sample collection devices for COVID-19 molecular testing, which was partially offset by a decrease in genomic sales. International sales of the company's OraQuick HIV Self-Test increased 17% compared to the third quarter of 2019, largely due to higher sales in Africa. Gross profit percentages were 63% and 60% for the 3 months ended September 30, 2020, and 2019, respectively. Gross profit percentage in the third quarter of 2020 benefited from an improved product mix associated with higher gross profit percentage product sales. Net income for the third quarter of 2020 was $1 million or $0.01 per share on a fully diluted basis compared to net income of $13.1 million or $0.21 per share on a fully diluted basis for the third quarter of 2019. Third quarter 2019 results included 2 gains associated with the sale of a business and a change in the estimated fair value of our acquisition-related contingent consideration, together totaling $12.5 million, which accounted for approximately $0.16 per share in 2019. Cash and investments totaled $263.7 million at September 30, 2020. As we disclosed in our press release, we expect revenues of $55 million to $60 million in the fourth quarter of 2020. As we discussed on our second quarter earnings call, we expect that, as we've just seen with the third quarter, non-COVID revenues will be flat or improved for each business unit in the fourth quarter compared with second quarter and that COVID-19 product sales will add to this performance. For the full year, we continue to expect that, excluding cryosurgical revenues from 2019, non-COVID-19 revenues in both the infectious disease and molecular collection lines of business will be down in 2020 compared to the year ago period, with molecular collection bearing the greater impact. However, as our revenue guidance for the fourth quarter indicates, we anticipate that the revenue opportunities for our COVID-19 sample collection products and tests will more than offset the year-on-year decrease in our non-COVID-19 lines of business such that our total revenues will be higher in 2020 than in 2019. With that, I'll turn the call back over to Steve. Steve. -------------------------------------------------------------------------------- Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Thank you, Roberto. Turning to our legacy businesses. HIV testing remains an important area of global focus for OraSure. Access to testing during the pandemic has been challenging as in-person testing facilities for HIV in the United States have been, in many cases, shut down. Self-testing, which enables social distancing and helps protect healthcare workers and test users alike, is a key strategy in the efforts to help people know their HIV status, especially under the current global pandemic conditions. Overall, our net HIV test revenues increased 6% over Q3 2019. This was driven by strong international sales of our OraQuick HIV Self-Test that increased 17% compared to the third quarter of 2019. To put this in perspective, a UNAIDS report noted significant decreases in HIV testing services between January and July in nearly all countries with available data. CDC and other government agencies have encouraged health departments at all levels to consider HIV self-testing as an additional testing strategy to reach persons most affected, which speaks to the usability and convenience of our at-home test, which allows individuals to test themselves and receive the results at home. To date, OraSure offers the only over-the-counter self-test for HIV in the United States and the only World Health Organization, or WHO, prequalified rapid oral fluid HIV self-test globally. I'd also like to briefly touch on our collection business outside of COVID-19. Although not yet back to pre-COVID levels, we saw increases in our genomics and microbiome kit sales quarter-over-quarter. Third quarter kit sales for genomics and microbiome were up 32% and 114% versus the prior quarter, respectively, driven by strength in the commercial market. Academic sales also increased quarter-over-quarter but to a lesser degree. Our laboratory services revenue showed a slight increase over the previous quarter. We continue to innovate in the microbiome arena, adding new products and services. Our DNA Genotek subsidiary has launched a skin microbiome collection kit. OMNIgene SKIN offers a standard method for collecting skin microbiome samples from sebaceous, dry and wet skin sites, which will aid researchers in obtaining reproducible high-quality samples. And a great example of how our microbiome services and products team complement each other, a start-up company, Pure Culture Beauty, has partnered with DNA Genotek and Diversigen to use data and science to deliver a comprehensive, customized skincare regimen to its customers. DNA Genotek will supply the OMNIgene SKIN microbiome collection kits and Diversigen will provide full microbiome service -- analytical services, offering a complete understanding of the user's skin microbiome. We continue to believe in the promise of our microbiome products and services and look forward to continued growth. In closing, our business momentum is strong, and we expect that trend to continue as evidenced by our guidance. We see COVID-19 testing as a robust part of our business for now and in the foreseeable future. With molecular collection devices already driving significant revenue and our antibody and antigen tests on the road to commercialization, OraSure is poised for continued and sustained growth. Our work with COVID-19 will help accelerate our growth significantly. We understand the opportunity for our tests and sample collection kits is substantial, and their role in the fight against COVID-19 is vital. We want to reiterate our confidence in OraSure's ability to bring our antibody and antigen test to market. We believe they will be worthy of joining the list of our other highly regarded OraSure products. With that, I will open it up the call for your questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from the line of Vijay Kumar with Evercore ISI. -------------------------------------------------------------------------------- Vijay Muniyappa Kumar, Evercore ISI Institutional Equities, Research Division - MD [2] -------------------------------------------------------------------------------- Maybe for the first one, Steve, I want to touch on the collection kit opportunity here, $18 million of revenues in the Q. The Q4 guidance implies a modest step up. And I think when you look at the capacity expansion, the goals that you guys had ramping up kit expansion from 35 million to 80 million. So I'm just curious, where are we on the expansion? What is the current capacity? Are you selling every single kit that you're making? What should the normalized revenues be for this part of the business once the capacity ramps up? -------------------------------------------------------------------------------- Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Vijay. I'll start by first saying, we are very pleased with the performance of our Molecular Solutions business unit. And in particular, the COVID-19 products that they're selling, 3, into molecular PCR tests. 2 products were seeing EUAs as we noted in my prepared remarks. While we're not breaking out revenue specifically, you're right that there is a step-up that's for molecular collection kits for COVID-19 that's embedded in our guidance of $55 million to $60 million for the fourth quarter. By the way, that $55 million to $60 million would be a record fourth quarter for us as a company. We are moving ahead with our expansion plans. We are almost to the point of selling everything we can make, which I think makes up (inaudible). So I think that as we look into 2021, the expansion that we announced in August will serve us well in terms of providing additional capacity to meet enormous demand in the marketplace. So this area of our business, which I think has come to fruition nicely in the second and third quarter, will continue to grow. -------------------------------------------------------------------------------- Vijay Muniyappa Kumar, Evercore ISI Institutional Equities, Research Division - MD [4] -------------------------------------------------------------------------------- Understood. And then I guess one for the follow-up, maybe on the antigen testing side. I understand that there'll be a push out here from Q4 to Q1. Maybe can you give us some color on what drove the push out? I guess, the question on investors' minds is what is causing the delay? Are there any technical challenges here? And as you think about that, I guess the language in the press release said that version 2, the at-home or self-swabbing version, would follow soon after. Is that sort of a first half event? Or I'm curious on how we should be thinking on the self-swab at-home version of the test. -------------------------------------------------------------------------------- Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Right. So we've only forecasted, as you noted, an EUA for our professional version of the test in the first quarter. But you may recall, Vijay, from our second quarter call back in August, that we indicated that even though we were going to seek sequential EUAs. So as you noted, professional then prescription self-test then over-the-counter self-test, we will actually be conducting the clinical trials in parallel to shorten the time between each approval. So part of our plan remains to do so. And while we're not providing specific information about when the prescription self-test and the over-the-counter self-test would be on the market, we believe it will be soon after the professional product is approved. And so we'll leave it at that for now. But I think it's important to step back and see what's been accomplished. What's been impressive to us is the technical work that's done to essentially validate that our -- the core of our OraQuick technology, which is a test strip, effectively. It's performing exceptionally well in limited detection studies compared to rapid antigen tests that are already on the marketplace. And so that is a significant progress for us right now. And the clinical trials that will go through between now and the EUA submission process in the first quarter, I think, we are very confident we'll validate the success of the product. What we are trying to do is something that no other company has done before. And that is essentially have a one-step rapid antigen test that is essentially the same design we'll use for the professional, the Rx self-test and the OTC self-test ready in design in the professional product. So no other product that's on the market today was designed specifically for that purpose, even though all of them are professionally used products in their own right. So we're taking the extra care based on our experience in putting the OraQuick HIV in-home test on the market. And also, by the way, developing the Ebola Rapid Antigen test back in 2017 in 9 months' time to get this on the market as quickly as possible. So there are always things that are unanticipated that come along in product development, but I think we're very confident in that first quarter EUA with the Rx self-test and the OTC self-tests coming soon thereafter. -------------------------------------------------------------------------------- Vijay Muniyappa Kumar, Evercore ISI Institutional Equities, Research Division - MD [6] -------------------------------------------------------------------------------- Sorry, what is the LoD on your antigen testing? And how does it compare to competition? -------------------------------------------------------------------------------- Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [7] -------------------------------------------------------------------------------- Well, so we haven't disclosed the numbers, Vijay, but they are competitive with the products that are already on the market. And those are -- that's public information. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Our next question comes from the line of Frank Takkinen with Lake Street Capital. -------------------------------------------------------------------------------- Frank James Takkinen, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [9] -------------------------------------------------------------------------------- Just a couple for you here today. I heard you guys talk in your prepared remarks a little bit about the October EUAs for the 2 DNA Genotek products. I was hoping you could just go a little bit deeper on that and how that could potentially debottleneck the process to continue to drive the momentum behind this business into the fourth quarter as well as into 2021? -------------------------------------------------------------------------------- Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [10] -------------------------------------------------------------------------------- Yes. So Frank, thanks for the question. So I think these are important breakthroughs for the 2 products that received EUAs. And so that's our ORAcollect RNA and our OMNIgene Oral products. And it's important because essentially, there's a pathway now for subcollection that wasn't available on the market before these products were approved, provided that they are used in a product that has also received an EUA for an individual to collect their own saliva specimen. So the use of the product, if you will, very clearly mimics what we've done for in genomic testing used by companies like 23andMe and others. And so from a technical perspective, it was very much in line with our expertise. And so it really does allow a pathway for self-collection for saliva. And I think it's important to recognize how far we've come in molecular testing from nasopharyngeal and oropharyngeal swabs to really the breakthrough, which is using saliva, which allows people to take their own sample and not subject themselves to the discomfort or pain associated with those deep swabs. So that's the breakthrough. And I think that evidence of that, we provided through the work of our customers. 30,000 students at the University of Kansas tested, 64 campuses of the State University of New York using the product. So you see widespread distribution of our product and even into the retail channels that we mentioned in our prepared remarks. So that is clearly the breakthrough, and that's why we're so excited about the progress and growth in our molecular collections, Molecular Solutions business unit, and that will continue into 2021 and beyond. -------------------------------------------------------------------------------- Frank James Takkinen, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [11] -------------------------------------------------------------------------------- Great. And then maybe one for Roberto. We saw gross margins came in at 63%. It's definitely a nice contributor to flipping the model back to profitable fourth quarter. I was curious if you could comment on that level of margins, given the increasing mix of molecular collection and the expected continued momentum behind this business? -------------------------------------------------------------------------------- Roberto E. Cuca, OraSure Technologies, Inc. - CFO & Principal Accounting Officer [12] -------------------------------------------------------------------------------- Sure. So you correctly deduced that the driver of that is the COVID-19 products, and we continue to expect those to be growing contributors to our revenues. So versus the third quarter and the fourth quarter -- in the fourth quarter, we expect gross margin to be at least as good as the third quarter and likely a bit better given the historical seasonality in our commercial genomics business. There will be some moderation to the gross margin as we see continued growth in our HIV international business, which is a lower gross margin business. But we do, overall, see this as a sustainable gross margin level that will see some seasonality from quarter-to-quarter in the coming year. -------------------------------------------------------------------------------- Frank James Takkinen, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [13] -------------------------------------------------------------------------------- Great. Congrats on the progress this quarter. -------------------------------------------------------------------------------- Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [14] -------------------------------------------------------------------------------- Thanks, Frank. -------------------------------------------------------------------------------- Roberto E. Cuca, OraSure Technologies, Inc. - CFO & Principal Accounting Officer [15] -------------------------------------------------------------------------------- Thanks, Frank. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Our next question comes from the line of Tycho Peterson with JPMorgan. -------------------------------------------------------------------------------- Casey Rene Woodring, JPMorgan Chase & Co, Research Division - Research Analyst [17] -------------------------------------------------------------------------------- This is Casey on for Tycho. I guess first question I have is, are you guys baking in any COVID antibody revenue into your 4Q guide? And then how do you see the market evolving for this test? I guess how much of an advantage is perhaps using oral fluid, how much of a competitive advantage is that? -------------------------------------------------------------------------------- Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [18] -------------------------------------------------------------------------------- So Casey, we have not broken out individual products into our guide for $55 million to $60 million. But I think as we announced back in August, once we locked prototype on the antibody test, we would begin building inventory that is manufacturing at risk. That has come to fruition. We have customers that are now evaluating our product on a research-use-only basis before we get our EUA. So that's moving along nicely. I think the market for this oral fluid antibody test is going to be expansive. It's coming at a great time when the discussion in the pandemic has moved towards seroprevalence and surveillance. There was an article out just today that said that there's probably 20% of New York City residents that have been exposed to the disease, but they haven't been counted or measured yet. So we really do not know the seroprevalence (technical difficulty) possibilities for our product in 2021 and 2022. In the rollout of a vaccine, this will be a powerful tool to accompany the vaccine to see what -- how much of the population are mounting antibodies to this virus overall. So -- and we know from our own experience with genomic testing that oral fluid sampling is a lot better than blood-based sampling. And this is the only product, if and when it's approved for EUA by the FDA, to use an oral fluid. I think there are over 300 antibody tests that use blood. So it -- in the tradition of OraSure, these are unique products with unique applications. -------------------------------------------------------------------------------- Casey Rene Woodring, JPMorgan Chase & Co, Research Division - Research Analyst [19] -------------------------------------------------------------------------------- Got it. And maybe just one on the antigen pushout. Just sort of a little more color on the reasoning behind it. I saw last week, the FDA updated its antigen test template that called for more studies to be submitted in the asymptomatic population. Just wondering, is it a matter of more studies that need to be done? Or was it about getting the sensitivity up to where it needs to be? Just any more color on the reasoning behind the push out. -------------------------------------------------------------------------------- Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [20] -------------------------------------------------------------------------------- Well, of course, when you're doing product development, there's always an iterative process involved with it. And then you add to that, they need to get clinical data from the field. So that interplay between, let's say, change in the chemistry and changing aspects of the design of the product to get to the point where we are comfortable with it, I think, contribute to the new forecast for the first quarter of next year. And I think that ultimately, the pushout won't matter to us commercially because I think we're very confident that once the product is on the market, we'll sell as many as we can make. So it has nothing to do with the external factors of what FDA is doing and everything to do with our own standards of performance. And as I said before, we are the only company that's designing a product specifically to ultimately be a self-test, whether it's an Rx self-test or an OTC self-test and designing those principles into the professional use product, for which we'll seek the initial EUA. So to do all those things to create a one-step rapid antigen test is a challenge that's not been accomplished by anybody yet. So that's why we're investing the time and effort to do it right. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Our next question comes from the line of Andrew Cooper with Raymond James. -------------------------------------------------------------------------------- Andrew Harris Cooper, Raymond James & Associates, Inc., Research Division - Senior Research Associate [22] -------------------------------------------------------------------------------- I guess maybe first on the antibody test and thinking about sort of the demand there. I know we've touched on it. But if I think back to when you guys initially talked about it, I think the statement was this was somewhat pulled from your substance of user or risk assessment customers saying, "Hey, we've got empty labs, and we can do this." Has that expanded potentially as you're approaching that, getting it to market hopefully to additional customers potentially kind of bringing your platform in and your place and going beyond sort of those labs? Or how do we think about the commercial opportunity there? -------------------------------------------------------------------------------- Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [23] -------------------------------------------------------------------------------- Yes. Andrew, you've recounted our previous statements correctly. And I think you're also right that we've moved even further beyond that with commercial opportunities. And I think the reason for that is that the use and need for antibody tests has changed since the pandemic first started back in March. And as I said earlier, we are now at a stage where antibody tests are going to be more important than they were in the beginning of the pandemic, particularly with prospects of a vaccine coming into play here. So with that in mind, there's a lot more commercial interest than we started from, and we are pursuing that, as I said, with research-only customers right now in the queue in anticipation of the EUA for the oral fluid antibody ELISA test. So yes, things are moving along, and we're seeing a lot of tailwinds for this part of the business. -------------------------------------------------------------------------------- Andrew Harris Cooper, Raymond James & Associates, Inc., Research Division - Senior Research Associate [24] -------------------------------------------------------------------------------- Okay. Great. And then maybe just quickly on antigen side. Just want to confirm, like you said for antibody, like you said before, kind of that manufacturing at risk comfort. Is that still the plan once you do have the final design locked in and sort of know what you're submitting to the FDA that you would still start manufacturing as soon as that's done? -------------------------------------------------------------------------------- Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [25] -------------------------------------------------------------------------------- Yes. That is still the plan. And based on significant inbound interest, there is very good reason for doing so. We want to be able to satisfy pent-up demand in the marketplace. And as I said, the design of the product, which aims for ultimately a self-test even though the first EUA is a professional test, is something that will be unique in the marketplace. -------------------------------------------------------------------------------- Andrew Harris Cooper, Raymond James & Associates, Inc., Research Division - Senior Research Associate [26] -------------------------------------------------------------------------------- Okay. And then maybe just one last one, if I could sneak it in. On that, understand that there is some of the kind of time line dynamics that have adjusted. But when we think about running some of the trials in parallel, does delaying the professional test maybe push the over-the-counter or the prescription self-test closer to that initial time line? Is there any chance where you can kind of compress the gap between the 2 as you've had more time to develop some of the data and fine-tune things? Or is it still kind of the same sort of lag here that we might expect as you go from 1 to 2 to 3? -------------------------------------------------------------------------------- Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [27] -------------------------------------------------------------------------------- Well, the lag period is somewhat in our control, as you can imagine, with the design and resourcing of clinical trials, but it's somewhat out of our control because, of course, FDA makes the final call on the EUA approval process, right? So we're doing everything we can to ensure that there's minimal time between the EUA submissions and hopefully, the approvals. We have evolved our thoughts, thinking a lot about what it will take to accomplish these clinical trials, and we'll make the investments we need to, to ensure that we shorten the time as much as possible. So I think that's been an evolving set of priorities for us since we spoke at our second quarter earnings call back in August. And so I think we're in a very good position there to minimize the amount of time overall and control what we can control. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- Our next question comes from the line of Patrick Donnelly with Citigroup. -------------------------------------------------------------------------------- Patrick Bernard Donnelly, Citigroup Inc. Exchange Research - Research Analyst [29] -------------------------------------------------------------------------------- Steve, maybe just following on, on the capacity side. I mean with the 1Q launch, obviously, kind of ramping at risk a little bit ahead of time, what type of capacity should we be expecting upon launch of the self-antigen test? I know you talked about expectations of selling pretty much everything you guys can make. So how are you thinking about capacity? And then at the same time, are you thinking about carving that up and directing a certain amount of capacity towards professional prescription, OTC? What's the right way to think about that from your side? -------------------------------------------------------------------------------- Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [30] -------------------------------------------------------------------------------- Yes. So we are on plan for what we announced previously, and that is -- we're going to move from 35 million tests per year to 55 million tests per year by the first quarter of 2021 and 70 million tests per quarter by the third quarter 2021. And remember, embedded in that capacity is about 17 million, 18 million units per year of capacity for our existing HIV, HCV and Ebola tests. So when we come on stream, ready to serve the professional market, we will have the capacity that you can calculate from our previous information. I think we're going to sell as many as we can make for the professional products. And then as we have more certainty about the timing for the Rx self-test and for the OTC self-test, we'll begin making allocation decisions about which products to get what capacity. I think we really do see a sweet spot in the self-test, whether it's Rx or OTC, and we'll make the combination that we need to from there. And I think, as I've said before, the design considerations here are to try to make the same form factor and product design for all 3 use cases, professional, Rx self-test and OTC self-test. That's an approach that I think -- I don't think any other company has taken in the marketplaces yet. So that design for manufacturing is really built into our plan here, and that's what allows us to have a more fungible discussion between... (technical difficulty) -------------------------------------------------------------------------------- Patrick Bernard Donnelly, Citigroup Inc. Exchange Research - Research Analyst [31] -------------------------------------------------------------------------------- Okay. Yes. You dropped off there at the end. I think I got most of it. And then one... -------------------------------------------------------------------------------- Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [32] -------------------------------------------------------------------------------- Sorry about that. -------------------------------------------------------------------------------- Patrick Bernard Donnelly, Citigroup Inc. Exchange Research - Research Analyst [33] -------------------------------------------------------------------------------- No, not a problem. One more on the antigen self-test. I apologize for circling back on this. But just on the time line, I just wanted to clarify. Last quarter, you guys kind of shifted from saliva to lower nasal. Obviously -- I just want to make sure the design approach, they're fully locked in right now, and it's just kind of refining things on your end, the data looks compelling. There's no big changes here outside of, again, kind of the normal course shifting in a few months. Is that correct? -------------------------------------------------------------------------------- Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [34] -------------------------------------------------------------------------------- That is basically correct, although we haven't announced prototype lock or anything like that. And we may not announce that. I think our goal is, at least right now, to announce when we actually submit the EUA for the professional application. But I think we're comfortable with our progress without revealing too much about what the final design will look like. And because we've had experience with HIV, HCV and Ebola, I think we know a lot about how to scale the manufacturing from there. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- Our next question comes from the line of Jacob Johnson with -- from the line of Stephens. -------------------------------------------------------------------------------- Jacob K. Johnson, Stephens Inc., Research Division - Analyst [36] -------------------------------------------------------------------------------- On COVID-19 collection kits, can you just talk about what you're hearing from customers in terms of near and long-term demand for their tests? I think given your fourth quarter guidance, it would suggest that demand is pretty strong, at least in the near term. But I would just be interested in any other color there. -------------------------------------------------------------------------------- Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [37] -------------------------------------------------------------------------------- I -- Jacob, I would say that we are approaching a point where we will sell everything we can make, and the capacity increases that we forecasted back in August will serve us well. And so we are seeing a rather insatiable demand for our products for molecular testing that we believe will continue certainly through 2021 and probably well into 2022. It began certainly in North America and in the U.S., but we're looking outside the U.S. as well right now. So it's -- these are great discussions to have because I think people have really gravitated to the fact that you need saliva and self-collection saliva as a key part of testing. -------------------------------------------------------------------------------- Jacob K. Johnson, Stephens Inc., Research Division - Analyst [38] -------------------------------------------------------------------------------- Got it. That's helpful. And then just maybe one question on the non-COVID front. You had a nice rebound in the HIV franchise in the quarter both internationally and in the U.S. I guess on the domestic side, are you beginning to see signs of clinics reopening and domestic test volumes increasing? And then a quick little aside there would be with the, I guess, third wave, as you described it in COVID here in the U.S. Should we think of, I think Roberto said, fourth quarter you expect to be better than the second quarter. But could we see maybe some of that rebound be muted here in the fourth quarter with COVID cases ticking back up? -------------------------------------------------------------------------------- Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [39] -------------------------------------------------------------------------------- Yes. I would say, directionally, we are seeing -- we've been seeing a pickup, as I think Roberto alluded to, in our U.S.-based HIV business. Some of that because with the clinic closings, CDC has actually issued guidelines urging those clinics to direct there would-be patients to our self-test. And so having that as an alternative in the marketplace has served us incredibly well. And so the hedge against the third wave of COVID creating a shutdown again will benefit our OraQuick HIV in-home test domestically for that reason. But we'd rather bet on the economy and clinics staying open, which benefit their professional products. So while we haven't given specific guidance by product line, that's the way we view the situation. So I think there's upside for us in both scenarios. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from the line of Brandon Couillard with Jefferies. -------------------------------------------------------------------------------- Unidentified Analyst, [41] -------------------------------------------------------------------------------- This is Matt on for Brandon today. Quick one on the Phase 1 rollout of your antigen test into the professional market. Any updated color on how you're thinking about ASP there? And then as well on the gross margin side, given the initial customer will largely be in the setting of doctor offices or university health centers that are likely to go through distribution channel, any color there on the margin side as well? -------------------------------------------------------------------------------- Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [42] -------------------------------------------------------------------------------- Roberto, would you like to take that one? -------------------------------------------------------------------------------- Roberto E. Cuca, OraSure Technologies, Inc. - CFO & Principal Accounting Officer [43] -------------------------------------------------------------------------------- Sure. So we haven't disclosed the pricing for the antibody test yet -- excuse me, the antigen test yet, other than to say that we expect it to be in line with the other products on the same technological platform and with products generally in that market. We have said that we expect the gross margin percentage to be at least as good as for our other products. And as a reminder, because there are 3 potential product types and product distribution channels, a lot of the actual achieved ASP and gross margin will depend on the mix amongst those 3. And that will be an evolving mix as we, first of all, get the EUAs for the products and then optimize the mix for our customers. -------------------------------------------------------------------------------- Unidentified Analyst, [44] -------------------------------------------------------------------------------- Makes sense. And then, Stephen, if we look at the balance sheet, you guys have $260 million of cash. You've done a number of smaller deals here, one divestiture. You're clearly spending right now to build out manufacturing. But curious how, if at all, your M&A appetite has evolved over the last few months. And if anything in the funnel is perhaps more actionable today than it was coming into this year. -------------------------------------------------------------------------------- Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [45] -------------------------------------------------------------------------------- Yes. We continue to look for attractive opportunities to leverage our balance sheet. I think that our business circumstances have certainly changed with the COVID-19 opportunities. And it remains our objective to look at acquiring companies, products, technologies that are accretive to our overall growth strategy. But as we look ahead to 2021 and 2022, the growth is going to be, I think, fairly enormous at current course and speed. And so we'll be adjusting our expectations of business development and the size and types of deals accordingly. But the pipeline has been robust, I think, as you suggested, both with our own outreach and inbound interest from potential prospects, and we'll continue to look at that. Our balance sheet, I think, is stellar. No debt at all on the balance sheet. And I think that will lead us to some interesting opportunities in the very near future. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- We do have a follow-up question from the line of Vijay Kumar with Evercore ISI. -------------------------------------------------------------------------------- Vijay Muniyappa Kumar, Evercore ISI Institutional Equities, Research Division - MD [47] -------------------------------------------------------------------------------- Steve, just one quick follow-up on the antigen testing. Maybe can you -- what should investors expect over the next few months, right? One, will we have any update -- will The Street have any update? And I'm asking because we had a push out to Q4 and now it's Q1. And I think The Street would like some updates in the interim. And the second was, when are the trials starting, right? Are these in-field clinical trials as in you're testing in the field on live cases, given these have to be self-swabbed? Is that what's causing the delay perhaps? And has the prototype for the device been locked yet? -------------------------------------------------------------------------------- Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [48] -------------------------------------------------------------------------------- Yes, Vijay, we have not announced prototype locks. So we haven't said anything about that. I do understand the interest in our product and the product development. I mentioned earlier in response to a separate question that we do plan to announce the submission of our EUA application for the professional test. That's our plan right now. Beyond that, we will have to see what we'll communicate and when. There are obviously some competitive issues that would -- we have to account for in any particular announcement. But the delays are not due to any particular factor other than we had very high expectations for the performance of the product and the clinical trials are running to validate the particular design and performance of the product. So that interplay has continued and ramped up since our August Q2 earnings call. So that will (inaudible) what I said before is that we will use what we understand are the standards for the FDA targeting a self-test and our own internal quality and performance standard as the measuring stick. And that's a very high bar, which is why it takes time to get this product on the market. But we are very confident that we're on the road to getting this product to the EUA process in the first quarter. And following with the Rx self-test and the OTC self-test shortly thereafter. -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- Thank you. This concludes today's question-and-answer session. I would now like to turn the call back to Stephen Tang for closing remarks. -------------------------------------------------------------------------------- Stephen S. Tang, OraSure Technologies, Inc. - President, CEO & Director [50] -------------------------------------------------------------------------------- We'd like to thank everybody for participating on the call and your interest in OraSure Technologies. We hope that you keep well and safe wherever you are and continue to enjoy your afternoon or your evening. Thank you very much. -------------------------------------------------------------------------------- Operator [51] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.