OraSure Technologies, Inc. (NASDAQ:OSUR) Q4 2023 Earnings Call Transcript
OraSure Technologies, Inc. (NASDAQ:OSUR) Q4 2023 Earnings Call Transcript February 27, 2024
OraSure Technologies, Inc. beats earnings expectations. Reported EPS is $0.27, expectations were $0.13. OraSure Technologies, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to the OraSure Technologies Inc. 2023 Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today Jason Plagman, Vice President of Investor Relations. Please go ahead.
Jason Plagman: Good afternoon, and welcome to OraSure Technologies' fourth quarter 2023 earnings call. Participating in the call today for OTI are Carrie Eglinton Manner, our President and Chief Executive Officer; and Ken McGrath our Chief Financial Officer. As a reminder today's webcast is being recorded, and the recording can be found on our Investor Relations website. Before we begin, you should know that this call may contain certain forward-looking statements including statements with respect to revenues and guidance, expenses, profitability, earnings or loss per share and other financial performance, product development, performance, shipments in markets, business plans, regulatory filings and approvals, expectations and strategies.
Actual results could significantly differ. Factors that could affect results are discussed more fully in OTI's SEC filings including its registration statements its annual report on Form 10-K for the year ended December 31, 2022, 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. OTI undertakes no obligation to update any forward-looking statements to reflect events or circumstances after this call. With that I am pleased to turn the call over to Carrie.
Carrie Eglinton Manner: Thanks, Jason and thank you to everyone for joining us today. We are pleased to provide an update on the progress OraSure is making on the three pillars of our strategic transformation: one, strengthening our foundation; two, elevating our core growth; and three accelerating profitable growth. A few notable items since last quarter include that we generated $41 million of operating cash flow in Q4 and grew our cash balance to $290 million. For the full year 2023, our cash and short-term investments increased by $180 million. We continue to execute on our COVID-19 contract and we delivered stronger than anticipated InteliSwab volumes during the quarter. Our enterprise-wide focus on driving improved operating efficiency continues to unlock incremental cost savings including gross margin expansion and reduced overhead expenses.
In February, we signed a strategic distribution agreement with Diagnostics Direct, which allows us to enter the US Syphilis testing market with the first CLIA-waived treponemal test. Of course, earlier in the quarter we also announced our investments and strategic distribution relationship with Sapphiros a consumer diagnostics company with unique technology platforms that plan to enable low-cost high-performance next-generation diagnostics and sample collection devices. We expect the distribution of Sapphiros' products will add at least two percentage points to revenue growth in our core business beginning in 2025. Starting with costs as we continue to strengthen our foundation. For the full year of 2023, we exceeded our target of $15 million in annualized cost savings.
Over the last 18 months we have developed an enterprise-wide mindset that is focused on continuous improvement and operational efficiency. As such we have identified and are working on a number of opportunities that are expected to generate additional productivity enhancements and cost reductions in 2024 and beyond, including consolidating facilities, further leveraging our automation capabilities and managing our non-production costs. These initiatives give us confidence in achieving our target of operating cash flow breakeven for our core business by the end of 2024. As we previewed on our last earnings call in Q4, we collected the final milestone payments from the US government related to the completion of our capacity expansion at our Opus Way facility in Bethlehem, Pennsylvania.
We also continued to make progress on consolidating our footprint by transitioning one of our distribution facilities into Opus Way in order to unlock operating efficiencies and cost savings. Moving to COVID-19. InteliSwab generated $42 million of revenue in Q4. As we discussed last quarter, we have visibility to order trends that are expected to fulfill the remaining portion of our largest contract with the US government and complete our deliveries during the first half of 2024. Looking at our core business, which excludes COVID-related products core revenue in Q4 increased slightly on a year-over-year basis. Core revenue growth was primarily driven by strong HIV sales in the US and international markets, which were partially, offset by declines in non-product revenue and molecular lab services.
We've discussed for the past 18 months that external partnerships are a fundamental part of our strategy to drive profitable growth in our core. We continue to execute on each of our initiatives to accelerate our innovation pipeline and expand our product portfolio. We've been sharing examples of strategic distribution agreements that build upon our existing strengths in areas such as infectious disease and sexual health. Along those lines, we are delighted to announce a new agreement with Diagnostics Direct, a New Jersey-based innovator that allows us to distribute their Syphilis health check on a semi-exclusive basis in the US. Syphilis is a growing public health epidemic and Diagnostics Direct's, Syphilis Health Check is the first FDA cleared CLIA waived rapid point-of-care syphilis test.
Earlier this month, the CDC released new recommendations on syphilis testing explicitly stating that “Accurate POC serologic antibody test for Syphilis can shorten the time to treatment, because the infection can be identified at the time of the visit or encounter.” Our agreement with Diagnostics Direct allows us to enter the US Syphilis testing market serving all channels and customers aside from a defined group of clients whom Diagnostics Direct will continue to directly support. Fundamentally, we are excited to add Syphilis Health Check to our sexual health portfolio and we view it as an important tool in the nation's response to Syphilis as a public health crisis and for clinical care more broadly. In addition to diagnostics, we are also expanding our portfolio in other important product categories.
In our substance abuse testing business, we've entered into an agreement with Veriteque USA to be a distributor for SwabTek, an easy-to-use surface testing technology that can quickly detect and differentiate concealed substances. We are pleased to add the SwabTek kits to our portfolio of drug and alcohol testing products allowing us to help keep workplaces schools and other critical environments safe. In molecular sample management solutions we have entered into an agreement with Anaerobe Systems to be a distributor of portions of their microbiome portfolio. Anaerobe Systems is a manufacturer of high-quality anaerobic culture kits and media that are highly complementary to our microbiome portfolio. OTI will be the exclusive distributor of the biome preserve anaerobic microbiome collection kit in order to better serve our clients with more comprehensive solutions.
Shifting to our current portfolio of molecular sample management solutions. Fourth quarter revenue from those products was consistent with our expectations and we continue to create positive momentum in establishing new partnerships and commercial relationships. We are also extending relationships across segments and have signed multiyear agreements with a diverse set of existing customers, which we believe demonstrates their confidence and commitment to the long-term opportunities in the genomics market. As an example we signed a multiyear agreement with GeneDx to provide saliva collection devices that will be used for pediatric exome and genome testing. GeneDx is a pioneering force in medical genetics, working to expand access to diagnostic insights especially, those focused on pediatric patients with neurodevelopmental delays and rare disease.
Looking at the overall market environment as we entered 2024, we see end segments that remain subdued as our customers adapt to the post-pandemic environment, macroeconomic uncertainty and evolving priorities, research and otherwise. Those factors and the uncertainty and timing for sustained recovery, is resulting in a muted outlook for core revenue in the first quarter. For the full year 2024 and beyond, we remain confident in our opportunity to deliver core growth. Our view is supported by multiple factors. First, the expansion of our product portfolio through the distribution agreements we've been discussing, which leverage our sales infrastructure and customer relationships. We expect the contribution from these agreements to increase, as we move through the year.
Second, our success over the last two years in diversifying our client base, through the addition of new and expanded relationships with diagnostics, pharma and biotech companies along with other innovators. We expect the revenue from customer relationships that we've launched in recent quarters will continue to grow during 2024. Third, our current expectations for ordering patterns from our sample management solutions from some of our key customers throughout 2024. Fourth, our view similar to outlooks discussed by our peers and others externally that underlying market growth in the life sciences industry, will begin to improve in the second half of 2024. Turning to our innovation road map. We continue to make progress on our initiatives to accelerate profitable growth through organic and inorganic investments.
At the beginning of the year, we announced our strategic relationship and investments in Sapphiros. As a part of this partnership, OTI gains exclusive commercial and distribution rights for key product lines in Sapphiros' development pipeline that are expected to strengthen our portfolio such as, blood collection devices and new diagnostic tests. We also see opportunities for co-funding and co-development of additional innovative offerings, as our partnership progresses. Overall, the partnership is off to a great start and our teams are working really well together in multiple areas including R&D collaboration and in preparation for the future launch of Sapphiros' initial self-collected small-volume blood product timing of course subject to regulatory review.
As we discussed in January, from a financial standpoint, we expect distribution of Sapphiros' products to add at least two percentage points to revenue growth in our core business beginning in 2025. Sales of Sapphiros' products are expected to be accretive to OraSure's operating profit beginning in 2026, due to our ability to leverage our existing infrastructure, capabilities and customer relationships. We anticipate a modest amount of incremental SG&A expense in 2024 and 2025 to successfully launch new Sapphiros products in the market and we believe our investment in Sapphiros is an efficient method to deploy capital, preserving flexibility for additional organic and inorganic innovation. With that, I'd like to turn the call over to Ken to discuss our financial results and guidance.
Ken McGrath: Thanks, Carrie. I'm happy to discuss our results for the fourth quarter of 2023 and provide updates on our financial outlook. In Q4, we delivered total revenue of $75.9 million. COVID-19 products predominantly InteliSwab contributed $41.7 million of revenue in the fourth quarter, which was above the high end of our guidance range. Purchasing patterns under our contract with the US government were slightly stronger than expected during the quarter. Core revenue which excludes COVID-19 products was $34.2 million in the fourth quarter, representing 0.4% year-over-year growth. Within core revenue, our diagnostic products generated $17.2 million of revenue in Q4 and grew 19% year-over-year. This growth was driven by HIV test sales in the US and international markets.
Looking at molecular sample management solutions. Fourth quarter revenue of $13 million increased 9% on a year-over-year basis which was in line with our expectations. Core revenue growth from diagnostics and molecular sample management solutions in the fourth quarter was offset by year-over-year declines in non-product revenue and molecular services revenue. As a reminder, non-product revenue is primarily related to funded R&D projects, grants and royalties, which are lumpy and not key growth drivers within our long-term strategy. From a gross margin perspective, our GAAP gross margin in the fourth quarter was 46.3% compared to 40.5% in last year's fourth quarter. Non-GAAP gross margin was 49.7% compared to 40.9% in the prior year period. Non-GAAP gross margin expansion in Q4 was driven by production efficiencies and cost reduction initiatives.
For the full year 2023, our GAAP gross margin of 42.3% increased by 400 basis points compared to 2022 and our non-GAAP gross margin of 45.5% expanded by 540 basis points versus the prior year. Overall, we believe we can drive additional gross margin expansion over the coming years and we remain focused on delivering efficiencies across our enterprise, including consolidating facilities, driving procurement savings, further leveraging our automation capabilities and streamlining our product portfolio. Shifting to operating expenses. Our total operating expenses in the quarter were $31.2 million, which includes $3.3 million for impairment of acquired intangible assets and certain manufacturing equipment and $3 million of non-cash stock compensation expense.
As we move into 2024, we continue to focus on driving additional savings in our non-production expenses. These incremental cost reductions are important as we look to utilize our cash to invest in growth and achieve our goal of operating cash flow breakeven in our core business by the end of 2024. GAAP operating income was $3.9 million in the fourth quarter. The non-GAAP operating income was $13.6 million. We ended the quarter with zero debt and total cash, cash equivalents and short-term investments of $290 million, which is $65 million increase from the prior quarter. The increase in our cash balance during the fourth quarter was primarily driven by $41 million of operating cash flow. We also collected $24 million in Q4 related to the achievement of capacity expansion milestones at our Opus Wave facility.
Turning to guidance. We are guiding to the first quarter revenue of $50 million to $54 million, which includes core revenue of $29 million to $31 million. As Carrie discussed, we expect core revenue growth to improve as we move through 2024 and we remain confident in our ability to elevate core growth in the coming years. For InteliSwab, we expect revenue of $21 million to $23 million in Q1 and approximately $40 million in the total – in total in the first half of the year as we complete the remaining portion of our largest contract with the US government. With that I'll turn the call back to Carrie to conclude.
Carrie Eglinton Manner: Thanks, Ken. Over the past year, OTI delivered meaningful progress on our strategic imperatives. We've strengthened our foundation including strong cash flow generation, improved operating efficiency and instilling an enterprise-wide focus on continuous improvement to fuel how we serve customers and grow. We completed the milestones included in our contract with the US government related to our capacity expansion at our Opus Wave facility earlier than expected and we made progress in streamlining our operational footprint in order to leverage the automation and infrastructure at our new facility. We grew core revenue by 2% in 2023 while navigating macro and industry headwinds. We expanded the portfolio of products that our sales team can provide to our customers in several important segments, including entering the US Syphilis testing market with Diagnostics Direct here in 2024.
And in early January, we announced our strategic partnership and investment in Sapphiros, which is expected to expand and accelerate our product and innovation pipeline. We expect our partnership with Sapphiros will accelerate our core revenue growth beginning in 2025. Overall, OTI continues to execute in order to deliver on our vision of transforming health through actionable insights, powering the shift that connects people to healthcare wherever they are. Our mission to improve access quality and value of health care with innovation in effortless tests, sample management solutions and services is aligned with where healthcare is headed in the coming years. With that, I'm pleased to turn the call over to the operator for Q&A. Stephen?
Operator: Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] And our first question comes from the line of Patrick Donnelly of Citi. Please go ahead.
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