Okay, I think we can just kick it off now. So I'm here with OraSure Technologies. We have CFO Ken and VP of IR, Jason, joining me. I'm Alexandra Higashi-Howard from the Life Science Tools and Diagnostics team at Evercore. I think maybe just to kick it off, can you guys give us, Ken, especially, a little bit of a background on how the company has changed since you came on board in mid-2022, and then Jason, from your perspective as well, since you've joined as VP of IR?
Yeah, definitely. So I joined last August, about a year and a couple of months now. Our first priority there was really stabilizing the foundation of the business, getting the financials in order, getting the cash position in order, and really looking at our profitability. Now that we've made some progress towards that, our focus continuing the last couple of months and, and prior, were around the core growth of the business, and then as we look forward to kind of enhancing our, and accelerating our profitable growth, both internally and externally.
Our theme that we've said a lot on earnings calls is, we, we're really approaching kind of a partnership approach. We, we joke that we wanna date before we get married. Given our cash position that we've built up, we have some cash, but not an unlimited amount. We wanna make sure that when we look at making our bets in the future, that we really place those bets, kind of strategically, and we look at it as a more of a portfolio of investments.
This is Jason. Real quick, from the IRC, I do wanna quickly say we'll make some forward-looking statements. So just remind everyone, we'll be discussing forward-looking statements today. Actual results may differ from those projected, and we'd refer you to our most recent 10-Q and 10-K filed with the SEC, where we discuss the factors that could cause our actual results to differ.
So with that legal disclaimer out of the way, I think since I joined, you know, about six months ago, I would say I've been really impressed by the team that, you know, that OraSure has in the leadership team. We've had some new additions over the last year or two that have really brought you know some great new ideas and things to drive innovation and process improvement of the company.
I think you know we've got a lot of opportunity there, and we've got a nice mixture of newer members of the leadership team, as well as you know legacy members that have been with the company for a little bit longer and in our employee base that have been with the company and really know our customers, clients, and the markets very well and have a lot of passion for the company.
So that's been great to see, and I think it's a nice mixture to, you know, to drive the company forward.
Great, thanks. You know, I'm gonna jump around a bit here, but I think just from kind of the beginning, you know, we've had a pretty choppy macro, and diagnostics and tools companies have, you know, been facing some headwinds they hadn't prior to 2023. What's your guys' sensitivity to economic cycles, and just like, how are you thinking about pricing, and kind of the macro going forward in 2024? Sort of what are the puts and takes, basically?
Yeah, some of the positive of being in healthcare is you're somewhat immune to some of that. For example, our diagnostic business is somewhat immune to the ups and downs of the macro environment. We get a little bit impact in our molecular part of the business on some of our end segment customers.
But the way we've kind of worked towards that is having a more diverse portfolio of clients. And kind of having a robust portfolio allows us to weather some of that.
Great. Do you have any price elasticity on either of those, like, diagnostics or the molecular portfolios, and-
No. Yeah, we look at pricing our products like everyone, you know, that's commensurate with the value of the products that we offer. But we don't. No, we don't look at it. We're not that impacted dramatically by the macro impact on pricing.
Okay. And, you know, as you mentioned, molecular has been a little pressured. I think, you know, you've seen several quarters of decline. You saw sequential growth in 3Q, but, you know, you've continued to see kind of muted growth in that segment overall. Can you just frame how you're thinking about it moving forward?
Yeah
... into 2024, and sort of when we can expect to see a return to growth and what that might actually look like in terms of the numbers?
Yeah, we're definitely excited about the segment long term. That's an area that has a lot of interest for us, and personalized genomics and all those spaces. For us, one of the ways that we have been working on it is building a broader client portfolio. We've announced some of those with, like, for example, Regeneron, with Quest, with Ziwig, with Grifols and some others.
And they're just examples of where we want to partner, providing our collection and our stabilization technologies and our molecular solution technologies, and working with them and becoming part of their process. So that's one of our approaches is building that out, as well as leveraging some of the other capabilities we have.
Where we look at it is expanding our sample types, whether it's, you know, expanding from saliva, urine into blood or other areas, as well as expanding some of our analyte types, going from genomics and going into proteomics, and other areas like that. That's how we look at kind of playing in this field in the future.
Great. And in terms of some of, you know, like, specifics on those partnerships, what I think—like, why have you seen, I guess, muted growth in 2023? What is it that you haven't gotten traction with in those partnerships that you think you can get going forward, and how are you sort of framing out how you develop those?
Yeah, we're excited. A, we want to add to the breadth of the number of clients that we have, and we want to integrate with them, into their workflow, and become integral and provide and add value to their process.... So right now we're at the stage where we're adding numbers, and then over time, they will take some time to develop.
As they grow, we'll grow, with them. As they grow some of their, you know, consumer genetics type portfolios, we'll grow with them. And then in other areas, they're making investments in the form of clinical trials to prove out use cases of some of our tools or some of our, some of our devices.
For example, we have a device, Colli-Pee, which collects first void urine, and we're partnering with some of our clients, where they're performing studies to see how that can be used as an alternative to other types of collections. We see progress there, but as they evolve, we'll grow with them and evolve with them.
Okay. And then what is, like, the key pipeline product in this business? Is there a, you know, sample collection type that you aren't doing right now that you think is most important? You know, how is that gonna expand what you already have in terms of your offering, and are there customers that that could sort of open up to and onboard that aren't open to you right now?
Yeah, yeah, no, it's great. We wanna leverage what we have. One of the areas that we see a lot of future promise is Colli-Pee and the use of urine as far as a sample type. But then it is getting into other sample types, like you mentioned, blood, and then getting into other analytes. And we want to expand that way as well.
And then as well as we've said that we want to be able to move up the value chain, both collection device stabilization and then extraction and other elements, moving up that value chain.
Great, thanks. Moving to, you know, diagnostics, you've—many of your peers have kind of commented on significant declines in COVID testing. You guys have continued to see upside to COVID testing and InteliSwab. You know, what do you think that you're seeing in the market that peers aren't seeing? Why are you still getting tailwinds from COVID?
Yeah, the team's done a great job of building relationships with one of our customers, the U.S. government. And we have weekly conversations with the U.S. government. I think we joke that we're kind of in the sweet spot. We're big enough to matter and make a dent in what they need for their their number of tests, but we're small enough where their business matters to us. And so they've invested in us.
They helped build out a facility and funded $109 million to build out a facility that we now have capacity to do over 100 million tests a year. And then we, we're strong partners with them. And for us, they've honored their contracts, and they've committed to them, and we've kind of stated out in the last couple of quarters some of the numbers with some of those contracts. We had about 26 million tests remaining back in Q2.
We did about 10 million tests of that contract in Q3, so we have about 16 million tests at our $5, roughly, price point. And we expect to do about 8 million tests in Q4 and then another 8 million in the first half of 2024. In addition to that, they had another RFP, and we were awarded about $5.7 million of that, which is really, it's free testing at home that you can order on, was it covidtest.org? I believe.
And so we have a strong partnership, and we feel like we've provided value to them, and we stay in contact with them. Like I said, once a week, we're in conversations. In addition to that, with other government agencies like BARDA, we've partnered with them to take on development work where they'll pay us kind of a cost-plus type arrangement to work on some tests that, again, maybe others bigger than us wouldn't want to take on. But for us, it's our sweet spot, and we've been partnering with them.
Great. Can you, you know, elaborate on what some of those tests look like?
Like, Ebola was one of those where it may not be big enough, but what they do is they wanna have it to be protected. So they'll do a cost-plus type arrangement with us, where we'll do the development, we'll have the test, and then if needed, we'll have a fair price where we can, where they'll buy the test from us.
Okay. And then is that, you know, $5.7 million or so contract, is that fair to look at that as the sizing of what endemic testing would look like from government sizing? What kind of conversations are you having with them around what expectations they have?
Yeah, I'll preface it with, every time I've tried to guess this, I've been wrong, so don't take, don't take what I say too strictly or firmly. But you know, we do think there's an endemic portion here. We don't know what it is, but we think it's less than where we are now. We are still trying to play in all those areas, like retail space. We are playing with the, not just national government, but also state and local governments.
And so we're trying to participate in all those areas. But it is all we can say is it's less than where we are now. I don't have a total sense. What we've said, I believe... I guess out loud, what we've said is that, we've said the $40 million dollars for the government contract next year, plus the $5.7 million, is what we've said.
Okay. And then when you're, you know, thinking about that Opus Way facility that you've built out that was for COVID manufacturing, how are you thinking about what that's gonna look like now that COVID is no longer at the forefront of the demand? Is there anything that you have to factor in in terms of government funding, and, like, they get to allocate how that facility gets used? What do you have to take into consideration here?
Yeah, yeah, yeah. No, so we have the flexibility to use it on other lines of business. So our other OraQuick, it actually works very well with our other OraQuick line, where we can leverage the capabilities, the automation, and the facility. So what we've done to date is, we were doing some manufacturing of HIV testing in Thailand. We moved a large portion of that back into Opus Way, where we can leverage the automation and take advantage of kind of the synergies there, and we can actually do it cheaper in Opus Way than in Thailand.
And in addition, we were leveraging the space where we have about five or six facilities in the Bethlehem, our headquarters, Pennsylvania area, where we consolidated recently. One of those was a warehouse that we got out of that lease, and we're saving money there, and we put the warehouse, moved the warehouse to Opus Way. So what we're trying to do is leverage that facility, take advantage of the synergies there, as well as leverage the automation.
So we're looking for opportunities there as best we can. But we do have the flexibility. What they ask for is when they give us a notice that they need the capacity, we're willing to work with them.
Okay.
We do, I think we, yeah, we stated out loud, I just said it earlier, we have capacity of about 100 million tests annually in that facility.
Okay, and from the operational kind of, you know, efficiencies that you get from the Opus Way. Is there any way that you could quantify or kind of give a sense of how much, you know, per test, how much cheaper it is for the manufacturing on that base business or quicker HIV?
Yeah, we haven't said it out loud. I think what we said out loud is we did some operational improvements in packaging-
Mm-hmm.
-which had a dual effect. A dual benefit is: one is it saved us... Well, it had a bunch of benefits. Saved us money, but we went to basically half the size packaging for our COVID test. It gets it better for shelf space for retailers because it's smaller space. And it's also good for the environment, and it saves on waste. But then the other benefit we also have is we're leveraging what we did there on some of our other products and other offerings to take advantage of that. So we're seeing benefit there.
The only things we've said out loud is we committed to $15 million overall of annualized savings in Q1. We've said that we've exceeded that. And then the other thing we've stated is that exiting next year, exiting Q4 of 2024, we will have our core business cash flow from operations break even. So you can almost do the math there and figure out how much we have left to save. And that's across the P&L. That's up and down the P&L, both in operations, we're looking at savings every day and a continuous improvement.
But then within the non-operating expenditures, we kind of have, with Carrie's leadership, we've developed this continuous improvement mindset. You know, Six Sigma, Lean, you know, you can think of all the different terminology for it, where we're really looking at all the elements of the business and all the processes, and how we can leverage and make those more efficient.
Great. I guess moving, you know, to margins there, you've sort of naturally gotten there. You've guided for a bit of a step down in gross margins in Q4. You know, you've talked about that as being due to a lower rev base as InteliSwab rolls down. What is the rate jump-off point that we should be thinking about for gross margins in, you know, 2024? And what kind of margin expansion can we expect over the course of next year?
Yeah, we had a great Q3, where we had our adjusted gross margins were 50% versus the 42% or so from Q2. That was driven by scrap, operational efficiencies, all the things we were talking about. Where we got it to for Q4 and then for 2024 is the mid-40s, and a lot of it is just because of the mix of the COVID testing.
And when we started COVID, COVID was actually kind of a drag on our margins. With the great work of the team and Kerry's leadership and our operational leadership, we've gotten where the point where COVID now is accretive to our overall gross margins. So as that wanes away, that'll be a little bit of a headwind to our gross margins.
But while we're doing that, we're also leveraging our efficiencies. So I think that mid-40s, it'll be a little bit better in the first half of next year because COVID will have more revenue in the first half, and then it'll be a little bit lower in the second half. But then it should pick up again as we start implementing more of our efficiencies.
Okay. And when you think, right, it's if we use mid-40s as a comfortable kind of jumping-off point, how what kind of margin expansion do you think you can get longer term, and how are you thinking about it?
Yeah, we haven't guided to that. We do think there is upside.
Yeah.
We think there's upside, both from a mix of business as well as overall operational efficiencies. And where we're driving them from is facilities consolidation, automation of our, of our current products, and then overall mindset.
So even again, in the non-operational part of the P&L, driving efficiencies in there as well, where that's really about process. Really process improvement, identifying your process, seeing where you have opportunities, and then driving those opportunities, how we're working towards.
Okay, and then on the base business, right, the base diagnostics and the molecular products, how do those two contribute to the overall corporate margins? Kind of where do they fall between that mid-40s%?
Yeah, I think we've said in the past that, molecular is higher. Our molecular portion of our business is higher margins, and our diagnostics a little bit lower. They're getting a little bit closer as we build up diagnostics, and build up those efficiencies and leverage Opus Way, as far as margins. And that higher margins from molecular recent years, a lot of it was COVID margins, and, those were higher than our overall margins from molecular.
So that portion, as that wanes away, we'll have a little bit of a down headwind towards it.
Okay. And then, you know, you've already referenced kind of your cash flow break-even goals, but when we're looking at OpEx, you guys declined, I think, about 17% sequentially in Q3. Is this the right base to sort of jump off from for OpEx for 2024? And what are the puts and takes there, and is there anything that we need to be particularly cognizant of that could drive-
Yeah, I'd love to say we can drop off 17%. That's not likely. It's a little bit lumpy, the OpEx expense. Two areas in particular are lumpy is our legal expenses, depending on just the ups and downs of, of legal, cases, and, and external counsel, expenses, as well as, some of our R&D, our funded R&D.
Mentioned earlier about BARDA and other areas, where we get funded, and that shows up in R&D, but it's offset in the revenue. Those can be lumpy, and because those are funded based on milestones and then paid off based on certain milestones.
So we expect Q4 for it to go up a little bit more because of those elements where Q3 is a bit of anomaly. But then the long-term trajectory is we're trying to make improvements and reduce overall OpEx.
Okay. Is there any sense you have as to, like, what the right base for OpEx is to go for 2024? Is it that up, you know, kind of step up from 4Q? Is this quarter the better number to work from?
Yeah, I'm going to purposely avoid your question, but I'll tell you how to think about it, and, you know, you- you're better at math than I am. The way to think about it is to get to our Q4 2024 exit run rate, you can almost back into kind of the math of we guide it towards gross margins. You can see where our operating expense needs to be at that point.
Mm-hmm.
We're not going to be there January 1st, but where we need to get to. And that's—and then we still have work to do beyond there. The way we think of it is, I wanna get—we wanna get our core business profitable by the end of the year, and then both continue that profitability, but then leverage the revenue expansion, and that drop down from there.
And that's how we're thinking about beyond 2024 and to grow our margins beyond there. So I purposely avoided answering your questions. I apologize.
That's okay. And I think, you know, maybe in, like, our final minute or so here, you referenced looking beyond 2024 and hitting, you know, base business breakeven. When you look at the portfolio of the business and sort of where you can go longer term, what are you most excited about? What do you think are, like, gonna be the key drivers once you guys do hit profitability, and what are you focused on to get there?
Yeah, the good, good thing is we have a position of cash right now that we can deploy both internally and externally. The way we look at it is, first, build on our strengths. So in diagnostics, we have strengths in our channel, we have strengths in our operational manufacturing, so we wanna build on that. So think of that of adding more tests. Adding more tests either as a distribution or as developing, or licensing, or et cetera. That's on the diagnostic side of it.
On the molecular side, and, you know, mentioned it earlier, it's really about different sample types, adding different sample types. It's about different analyte types, and having those capabilities, as well as improving up the value chain or working up the value chain. And then it's really lots of client relationships.
We wanna build out that portfolio of customers and clients, and demonstrate our value and become sticky within their processes because we've added value. So that's our goal, that's our plan. And we wanna stick to our core right now. If there's opportunities, we could always be opportunistic, but right now we wanna stick to where our strengths are and build off of that.
What opportunities do you think, you know, obviously, you're not necessarily pursuing them right now, but what have you seen that's come up in the market? Is there anything that's been maybe keeping in mind and interesting for going forward?
Yeah, we've been in all those areas I described. There's visibility to opportunities. You know, we're being selective of making sure that we spend our limited capital as best we can with the best ROI, best return. We're probably gonna see more of multiple partnerships versus big one-off deals, just 'cause we wanna make sure we have multiple bets that we place.
So it's in those areas that we are seeing all of them. We're a little bit unique that in our space, we're profitable and we have cash, which is right now a little of an anomaly. So we have had people approach us, and we're trying to sift through the appropriate opportunities.
Great! Well, I think with that, we're out of time. Thanks so much, Ken and Jason.
Thank you very much.
Thank you.