Welcome to the OraSure Technologies, Inc 2021 fourth quarter earnings conference call. My name is Daryl, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star then one on your touchtone phone. I will now turn the call over to Scott Gleason. Scott, you may begin.
Good afternoon, and welcome to OraSure Technologies fourth quarter 2021 earnings call. I am Scott Gleason, the Interim CFO and SVP of Investor Relations and Communications. Presenting with me today for OraSure is Dr. Stephen Tang, our President and Chief Executive Officer, Lisa Nibauer, our President of Diagnostics, and Kathleen Weber, our President of Molecular Solutions. As a reminder, today's webcast is being recorded, and the recording, along with the slide presentation accompanying the webcast, can be found on the Investor Relations section of our website.
Before we begin, you should know that this call may contain certain forward-looking statements, including statements with respect to revenues, expenses, profitability, earnings or loss per share and other financial performance, product development, performance, shipments and markets, business plans, regulatory filings and approvals, expectations and strategies. Actual results could be significantly different.
Factors that could affect are discussed more fully in the company's SEC filings, including its registration statement, its annual report on Form 10-K for the year ended December 31, 2021, its quarterly reports on Form 10-Q and other SEC filings. Although forward-looking statements help to complete information about future prospects, listeners should keep in mind that forward-looking statements are based solely on the information available to the 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'm pleased to turn the call over to Dr. Stephen Tang.
Thank you, Scott, and thank you to everyone for joining our call today. In 2021, OraSure delivered record revenue for both our Diagnostics and Molecular Solutions businesses, with our total company revenue growing at a 25% compounded annual growth rate since the pre-pandemic period in 2019.
Revenue in the fourth quarter was $63.6 million, above our pre-released range and the guidance we provided in the third quarter, and a new record for the company. We achieved total InteliSwab revenue of $14.7 million, an increase of 92% on a sequential basis. We're making significant progress scaling up production. While there's still more to do, we believe we are in a position to grow InteliSwab revenue meaningfully throughout the year. In the fourth quarter, we once again saw outperformance from our Molecular Solutions business.
Despite major direct-to-consumer customers taking larger inventory positions in the third quarter, we demonstrated sequential growth and had our third straight quarter with revenue exceeding $30 million. We believe that our multi-omics strategy of expanding our sample collection and molecular services businesses, coupled with new customer additions, positions us well as we look forward to 2022.
Finally, our executive leadership team and our board of directors is focused on maximizing shareholder value, and our strategic alternative process is underway. Until the board reaches a decision, we will not be making any comments other than to say we are dedicated to identifying the best path forward for our company to further create value for our shareholders. In any scenario, we believe we are well positioned to scale the business meaningfully in 2022 with an eye towards driving profitable growth. With that, I'm pleased to turn the call over to Lisa Nibauer for an update on the Diagnostics business unit.
Thanks, Stephen. I would first like to provide a quick overview of our core diagnostic business, followed by an update on our progress with InteliSwab. First, for the full year 2021, the overall diagnostic business unit revenue was $90 million and grew 38% versus last year. Our global core diagnostic business, excluding InteliSwab product revenue, grew 3.5% versus prior year. If you exclude the impact of the June 2021 expiry of the Bill & Melinda Gates Foundation subsidy for our international HIV self-test, the core diagnostic business grew 8.6% versus prior year. In the U.S., core diagnostics grew 13.3% for the full year 2021.
This was driven by strong performance across HIV, HCV, and our drug testing business with the reopening of clinics and new employee hiring, as well as CDC orders for our HIV OTC test to mail to home as part of the CDC's Let's Stop HIV Together program. Outside the U.S., the international diagnostic business declined 6.2% versus prior year. Excluding the Gates subsidy impact, the business was up 3.4%.
In addition, we experienced logistical disruptions from the pandemic all year, which impacted the timing of shipments, including those at year-end. Part of our strategy with our diagnostic business is to accelerate growth by expanding globally, and we have made significant strides on that initiative this past year.
In late 2021, we received our Thailand free sales certification, which will allow us to register the product in Asia and Latin American countries, regions we were unable to access without this certification from the country of origin. In addition, early in the first quarter of this year, we launched our HIV self-test into six European countries, including the United Kingdom, Germany, France, Spain, and Portugal, where the test will be available in retail pharmacies.
This year, the World Health Organization also issued the first guidelines on HCV self-testing. The WHO estimates that 58 million people in the world have hepatitis C, yet less than one-quarter know they are infected. That is over 45 million people who have this disease and do not know it. Importantly, hepatitis C is curable with medication if detected early. If not detected, hepatitis C can result in significant liver damage and possibly death.
As stated, quote, "The WHO has set a global goal to eliminate HCV as a public health problem by 2030. Meeting this goal requires innovative approaches and service delivery models for reaching the people who remain unaware of their HCV infection and linking them to treatment and care services. Self-testing is one such approach," unquote. These guidelines represent strong support for the continued need for ease-of-use self-testing by lay users, an area where OraSure has a strong product and many years of expertise. In addition, the U.S. also issued its first viral hepatitis elimination plan, also focused on eliminating this disease by 2030. The expansion of self-tests is core to our strategy to drive both revenue and gross margin growth moving forward. Now I would like to discuss IntelliSwab and the important tailwinds which now support further COVID-19 self-testing in the United States in particular.
As we previously announced in January, while we experienced lower than expected IntelliSwab sales for the quarter due solely to our supply, we are optimistic about the future trajectory. In January, the Biden administration announced a federal government commitment to purchase a total of 1 billion COVID-19 rapid antigen tests and distribute them free directly to individuals that request them online. OraSure, with our existing U.S. government procurement contract, will be able to supply this program in addition to other federal programs as dictated by HHS. In addition to this 1 billion test procurement program, in January, the Biden administration also mandated that commercial insurers as well as Medicare and Medicaid provide reimbursement for OTC COVID-19 rapid tests. Under this program, consumers can now purchase up to eight COVID-19 rapid home tests per month per person and receive reimbursement from their insurance provider with no associated copay or deductible.
For those insurers who establish preferred retail partners, consumers will be able to obtain tests free of charge by showing their insurance card right in store. The payers will then reimburse retailers at $12 per test or $24 per two-pack. If an insurer does not establish preferred retail partners, then the consumer will need to pay out of pocket and send receipts to their insurer to receive reimbursement. This reimbursement will be at the retail price paid. Given the almost 300 million individuals in this country with health insurance, we believe this expands the theoretical market opportunity for COVID-19 testing in the U.S. to over $150 billion.
Furthermore, we would highlight the potential benefits this may have as we look to the future for self-testing, as these types of payer models could be used to empower patients and reduce healthcare costs with other disease states. As a reminder, the market model we shared with investors last quarter based on epidemiology had less than 500 million tests assumed as the U.S. market size in fiscal year 2022.
Now, with these new developments in procurement and reimbursement for OTC rapid tests, we believe the 2022 COVID-19 rapid test market in the United States will be significantly larger than we anticipated. Overall, these changes also make us more optimistic on the long-term durability of the COVID-19 market in the United States as we plan to scale our production capacity to over 200 million tests per year.
We also continue to garner data to support InteliSwab accuracy and to expand indications. At the start of 2022, we added a number of important label expansions for the test. First, in early January, the FDA announced concern that certain lateral flow tests may not be as accurate with the Omicron variant. As required with our emergency use authorization, OraSure initiated studies using live SARS-CoV-2 Omicron virus in an independent third-party laboratory to evaluate our test's ability to detect variants of concern. Importantly, the data indicates that InteliSwab detects Omicron at the same level of detection as it did with all other variants of concern and the original Wuhan strain.
Second, we also recently announced that our InteliSwab tests have been authorized by the U.S. FDA for use in children ages two to 14. Prior to this announcement, InteliSwab was authorized for self-testing use in adults 18 and older and in children 15-17 when administered by an adult. This is an important indication expansion, which enables us to provide tests with numerous test-to-stay programs being rolled out in many school districts, as well as many other state testing programs focused on household testing.
Finally, the company recently announced the launch of a new reporting app, InteliSwab Connect, which will allow people to save images of their own results, to easily report their test results to public health authorities, and to also provide results to employers. The app will be available on the Apple App Store and via Google Play. In 2022, the U.S. market provides significant demand via both our U.S. government procurement contract, also numerous non-government customers. We will be able to sell all that we can produce.
That said, we are working to create certain packaging configurations specifically for markets outside the U.S. and will be conducting the necessary studies this year to enable international sales in 2023. In addition, we have plans to improve gross margin for InteliSwab with these configuration changes and other savings as we scale.
Lastly, I would like to discuss our manufacturing scale-up with InteliSwab. As part of our organizational restructuring, I assumed leadership of the diagnostic operations team at the start of the year. From a background perspective, I'm a chemical engineer with extensive medical device operations management experience. I started my career in engineering and plant management in large chemical plant operations, and in my most recent role prior to OraSure, I led the Becton, Dickinson global Vacutainer business, as well as BD's global syringe, needle, and IV catheter businesses.
Collectively, these businesses manufactured 10 billions of medical devices in numerous production facilities around the world and represented billions dollar in annual revenue. To further aid in our operational scale-up, and in addition to other ongoing efforts, I hired an operations consulting firm used by the National Institutes of Health RADx program with deep expertise in manufacturing scale-up in rapid antigen testing.
We have been working on process mapping and identifying major bottlenecks where resolution can lead to the greatest incremental efficiency. We also have experts at our contract assembly sites to help identify areas of opportunity for further efficiency. The team has already identified a number of significant areas for improvement to accelerate our scale-up and improve our operational efficiency throughout 2022 and beyond, and I am confident in their leadership and ability to assist in our scale-up throughout 2022.
Some of the operational improvements the team has recommended will take time to implement and are exacerbated by the challenges we face in terms of the challenging labor market and global logistical and supply shortages as a result of COVID-19. While we are not providing formal IntelliSwab guidance or capacity expectations, given our strategic alternative process, we do expect to scale IntelliSwab modestly in the first quarter with more meaningful gains throughout the remainder of fiscal year 2022. With that, I am pleased to turn the call over to Kathleen to discuss our Molecular Solutions business unit.
Thank you, Lisa. As Stephen previously stated, our Molecular Solutions business unit had another exceptional year, with total revenue growing 35% despite a more modest 7% increase in COVID-19 collection kits year-over-year. In the fourth quarter, we saw sequential revenue growth despite changes in the ordering patterns for our major direct-to-consumer customers, who took the majority of their seasonal holiday inventory in the third quarter, earlier than their historical fourth quarter purchasing. In 2021, we added 650 new customers and extended our multiyear contracts with six large existing customers, positioning us well for future growth. This quarter, our Diversigen services revenue and our microbiome kits revenue was $5.9 million for our second-highest quarter ever.
Our overall microbiome kits and services business grew at almost 40% in calendar year 2021, and we anticipate this to be a strong source of growth looking forward. This slide shows a representation of our multiomic strategy. Our strategy of enabling multiomic discovery and diagnostics is grounded in a strong backdrop of high-growth omes and high-growth customer segments, including disease risk management, diagnostics, research and discovery, animal, and environmental.
We continue to expand our product and service offerings to extend both patient access and insight to a wider range of samples and analytes of high interest to these customers. The shaded boxes on this slide show areas where we currently compete, the dashed bars show areas of interest, and the stars show planned product or service launches. In late 2021, we launched our new gut metatranscriptome service offering through our Diversigen subsidiary.
For those that don't know, the metatranscriptome looks at gene expression levels across the metagenome. Our pharmaceutical and research customers have been highly interested in this technology, which can provide important insight into mechanism of action for IP and regulatory filings. We believe the metatranscriptome will provide a new avenue for growth in both collection kits and services, with additional launches planned for this year.
In the fourth quarter, we also received FDA clearance for our OMNIgene•GUT Dx collection product. Importantly, this action marks the first time that the FDA has cleared a device specifically for the collection and stabilization of the microbiome for diagnostic or clinical purposes. This innovation will support our commercial customers as they seek to launch clinical assays based on the microbiome or want the reliability of an FDA-cleared device in their therapeutic development programs.
In the second half of 2021, we saw a number of very positive phase II data readouts from industry leaders developing microbiome-based therapeutics in disease areas such as C. difficile, ulcerative colitis, and cancer. This progress is a strong leading indicator for the successful clinical use and continued expansion of the microbiome research, diagnostic, and therapeutic fields.
Finally, in late 2021, we advanced the potential of our urine collection business with the launch of a new preservation chemistry for use with our Colli-Pee urine collection device. This new chemistry is specifically designed to stabilize analytes in urine critical to oncology applications such as liquid biopsy. We continue to advance our work toward incorporating Colli-Pee into multiple applications in the infectious disease and oncology fields.
As you can see, we are aggressively supporting our vision of enabling multi-omic discovery and diagnostics through innovation. Finally, I would highlight that our COVID-19 collection kit business outperformed expectation in the fourth quarter, given the surge in testing activity around the Omicron variant. As we look forward to 2022, we will be expanding internationally in six target countries in Europe and Asia.
Additionally, we plan to launch a new product format, which we believe will further aid our expansion into viral surveillance and screening. Despite these positive developments, we continue to anticipate volatility in this segment based on COVID-19 prevalence rates and as the market increasingly transitions to over-the-counter and point-of-care testing solutions. With that, I'm pleased to turn the call back over to Scott.
Thanks, Kathy. I'm pleased to discuss our financial results for the fourth quarter and provide updates on our financial outlook. First, from a top-line perspective, we delivered total revenue of $63.6 million in the fourth quarter of 2021 compared to $62.9 million in the prior year, representing year-over-year growth of 1%. I would highlight a few items.
First, as Stephen mentioned, this quarter was a record revenue quarter for the company, and despite the shortfall in InteliSwab revenue relative to expectations, we were able to exceed our financial guidance given strength across the remainder of the portfolio. Additionally, from a growth perspective, last year's fourth quarter was a tough comp for a number of reasons.
First, the fourth quarter of last year contained $22.8 million in COVID molecular kit revenue, essentially offsetting all of the positive growth we received from InteliSwab in the quarter. Additionally, the fourth quarter of last year had exceptionally high international HIV sales and different ordering patterns for our direct-to-consumer customers in our genomics kit business.
Overall, with the exception of the InteliSwab shortfall relative to expectations, we are exceptionally pleased with strong fourth quarter results. Turning to our gross margin. Our gross margin percentage in the third quarter was 42.7% and improved approximately 290 basis points relative to 39.8% gross margins we saw in the third quarter, despite the higher InteliSwab mix and continued manufacturing efficiencies in the quarter with our scale-up process.
This quarter, we did receive a benefit associated with the employee retention credit, which is part of the CARES Act, which offsets the payroll tax contribution and accounted for a portion of the total sequential improvement. As we look to InteliSwab, we continue to expect transitory margin pressures as we scale up process and improvement production efficiencies. This will be driven by higher scrap rates, lower overhead absorption, labor inefficiencies, and as we train new personnel, and higher shipping costs associated with the global supply chain crisis.
Additionally, in the near term, our margins will be impacted by our government procurement contract for InteliSwab, which has pricing below market rate. While these pressures will weigh on our near-term gross margin profile, we have line of sight to a number of potential significant improvements in InteliSwab gross margins that we believe will begin to manifest throughout 2022 and beyond.
First, we expect to become a more efficient as we transition through the year from a labor and scrap perspective, and as we grow revenue, we'll see greater overhead absorption. Second, we anticipate a significant reduction in our freight costs, and we expect to transition to sea shipment from air shipment in 2023. Air shipment rates have increased dramatically with the global logistic crisis.
Finally, we expect pricing improvement as our mix becomes increasingly commercial beginning in the fourth quarter of this fiscal year. We also are evaluating a number of efficiency programs for InteliSwab, and Lisa mentioned we are working on a package configuration change for next year with significant positive cost implications. Overall, we view efficiencies in our manufacturing processes strategically important for the company, and our InteliSwab scale-up presents long-term opportunities to improve our overall manufacturing efficiency.
Ultimately, we expect InteliSwab gross margins to be at or above our gross margins for our overall diagnostic business unit. From an expense perspective, total operating expenses in the quarter were $36.5 million and increased 6% on a sequential basis. We have placed a high emphasis on expense control, and this quarter, operating loss improved by approximately $3 million sequentially. We continue to look for efficiencies across the organization as we transition to 2022 with an eye to driving profitable growth looking forward. From a financial outlook perspective, we are not providing financial guidance as we work through the strategic alternative process.
We would highlight that typically our core business experiences significant seasonality in the first quarter, given reductions in international test shipments at the start of the calendar year to our NGO partners and seasonality associated with the molecular kits and services business. We will look to reinstate financial guidance following the completion of our strategic alternative process. With that, I'm pleased to turn the call back over to Stephen for concluding remarks.
Thank you, Scott. As you know, this is my last earnings call with OraSure, and I would like to personally thank all of our employees across the globe for the tremendous work they've done and their dedication to our mission. I also want to thank our investors who have supported us over the years and our board of directors for the opportunity to serve both as Chairman of the Board and Chief Executive Officer over the past 11 years. I'm extremely confident in our outlook and the capabilities of our executive leadership team to transform the company in the coming years. The power and sustainability of OraSure comes in our focus on smart science made simple, and I'm firmly convinced that the growth in areas such as point-of-care testing, self-testing, consumer and clinical genomics, and new areas of discovery like the microbiome Because of these factors, I will leave knowing the company has a strong foundation and is in extremely capable hands. With that, I'd like to turn the call back to Scott for questions and answers.
Thanks, Stephen. Operator, we're now ready to begin the Q&A portion of the call. We ask that you limit your questions to one question and one follow-up to ensure broad participation.
If anyone has a question, you can press star then one on your touchtone phone. Once again, if you have a question, it's star then one on your touchtone phone. Our first question comes from Tycho Peterson.
Hi, guys. This is Casey on for Tycho. Thanks for taking my questions. First one is, you know, last quarter, you gave a purchase order number. I think it was $400 million for the COVID test that you couldn't fill because of supply constraints. I'm curious if you could provide us with the number for this quarter, if it declined sequentially, and can you maybe break out demand here between retailers and government orders?
Yeah. Thanks, Casey. It's Steve. We aren't gonna give a specific number, but I think I'll turn it to Lisa, who provided, I think, some great commentary about strong demand so far and the momentum we've had since we announced that $400 million in the third quarter. Lisa?
Yeah. Thanks, Stephen, and thanks for the question. We continue to have very strong demand for our tests. We are currently able to sell everything we can make. Our U.S. government relationship is very strong. As you know, we have a government contract, and we meet with them every week. Basically, they've told us to prioritize orders for our OTC retailers and non-government customers, and then they will take whatever we have week to week beyond that. That's pretty much what we can share at this point. We do indeed have, again, more orders and interest coming in than we have product to fill currently.
Gotcha. Maybe that leads into my next question. I know you guys aren't guiding for capacity expectations, but it sounds like the 4 million per month in 1Q 2022 that had been previous guidance, you know, it's safe to say that isn't really realistic for this quarter. I'm just wondering, I know that the prior plans were to scale up to 8 million per month by end of June. Is that still kind of a realistic number to be modeling or, you know, any sort of directional guidance in terms of the cadence of capacity scale-up would be helpful for modeling purposes.
Yeah. Casey, we're not gonna offer specific guidance against those numbers. I think we stopped doing that, as in January with our announcement. I think what you can rely on is Lisa's comments about selling everything we can make and the progress we're making in production, which we have defined as modest for the first quarter and more significant throughout the year.
Okay, fair enough. Maybe my last one before I'll hop back in the queue is around the international HIV business. The roll-off of the Bill & Melinda Gates Foundation subsidies are obviously kind of impacting things here. Just wondering what we can expect in 2022 in terms of revenues relative to 2019 levels. Is there sort of any visibility into maybe a new subsidy agreement in 2022 and, you know, anything to kind of talk towards on the international business? Thank you.
Yeah. Thanks, Casey. We don't expect a new subsidy agreement in 2022. Brett, Scott, maybe you'd like to just generally comment about the outlook for HIV.
Thanks, Stephen. Thanks, Casey, for the question. You know, as we look at the international HIV business, Casey, that subsidy rolled off in the June quarter of last year and had been declining for some time. We'll fully annualize that subsidy as we get through June this year. I think importantly from a volume standpoint, we've seen, you know, strong volume growth outside the United States. I think the good news is as we annualize that subsidy, we should start to see improvements in the growth rates with our international business.
Our next question comes from Brandon Couillard from Jefferies. Go ahead, Brandon.
Hey, guys. This is Matt on for Brandon today. Just quickly, can you give kind of your high-level pricing outlook? I think you talked about the government contracts being a little bit below, you know, commercial pricing and mix improving the end of this year. Just kind of your high-level pricing outlook, both U.S. and OUS and, you know, any color you can add on, you know, government contracts versus, you know, commercial or retail contracts. Thanks.
Yeah. Thanks, Matt. Scott, do you wanna comment?
Yeah. Yeah, Matt, we don't give specific pricing information. You know, it varies across customers. I mean, I think the one area where you'd know, obviously our pricing is on the government contract, which was publicized. You know, our pricing there was about $5 a test or $10 per OTC kit that we supply to the government.
You know, what we've seen from commercial pricing is that commercial pricing is higher than that, but we haven't given any kind of specific information. You know, I think as we look at the pricing environment, we really haven't seen anything change dramatically. Obviously, there's still a supply imbalance where demand exceeds supply. And so I think, you know, that's about all we can really say at this point.
Okay, thanks. You know, just talking about the restructuring and kind of deciding to vertically integrate the business on the DX side and then Molecular Solutions, you know, why is now the right time to do that? And any way to kind of talk about or quantify some of the benefits you expect to realize from this?
Sure, Matt, I'll start. I think it's very clear that the needs and capabilities of each business unit for operations is different, and that's why we made the change to what we announced in January. I think Lisa gave some great commentary in terms of her background and some new capability that she's brought on board. It's designed to focus operations to the needs of the specific business units rather than have operations be a corporate function. We haven't quantified that as yet, but I think our expectation is it will help overall performance in operations, both in quality and quantity, and efficiency and productivity, for both business units.
Okay, great. Then just last one, I think you said microbiome all-in kits and services was kind of $6 million in the quarter, so you know, kind of a $25 million run rate business. Could you talk about how big this business can kind of get over the next few years? You know, you're in a number of clinical trials. How do we think about as those move along? Is it kind of a hockey stick at phase III, or how do we think about you know, the contribution to you guys as those move through the clinical pipeline? Thanks.
Yeah, of course. We've always viewed microbiome as a high growth business, both from a products and services side. I'll turn it over to Kathleen for some further commentary.
Yeah, sure. Thanks for the question. As Stephen said, microbiome is viewed as a very high growth market. We study all the omes, genome, microbiome, transcriptome. Of all of them, microbiome is projected to have the highest growth rate over the next five years. Our business really benefits in multiple ways.
To your point, the clinical trials that are progressing are revenue for us today as we support those both with kits and with Diversigen services. Also as assays, customers start to look at microbiome-based assays and DTC applications in the microbiome field, that benefits us as well. A lot of factors driving that high projected growth for the microbiome, and we're clearly investing in that growth on both the kits and the services side.
Matt, if I could just add one thing. I think one nice part about, you know, the agreements that we have is a lot of these studies are in the, you know, early stages, phase I, phase II. As they advance into the phase III setting, you know, typically the number of samples that you're dealing with expands dramatically. You know, and so the revenue associated with those contracts as you move into, you know, later stage studies, also increases. That's a trend that we would expect to see over the next few years.
Great. Thank you.
Our next question comes from Patrick Donnelly from Citi. Go ahead, Patrick.
Hi, this is Lizzie on for Patrick. Thanks for taking my question. I guess my first question is on the margin impact from InteliSwab. Can you talk about, you know, you said the impact would be transitory. I guess, how do you plan on improving that margin pressure this year, yes, and beyond? Thanks.
Yeah. Thanks, Lizzie. I'll turn it over to Scott for that one.
Yeah. Thanks, Lizzie, for the question. Yeah, I think as we look at the InteliSwab gross margin, you know, I think that you just have to think about kind of the situation we're in and how that transitions as we go through the year. You know, first off, you know, we obviously have a lot of equipment, you know, overhead that as we increase the volume of testing, that overhead gets absorbed over a larger volume base. And so that will provide a benefit, you know, from a gross margin standpoint. You know, secondly, when we look at equipment, labor, materials, you know, as you're in the scale-up phase, as Lisa discussed, you're not using those efficiently, and so there's a lot of efficiency gains that we would expect as we transition throughout the year.
I think the third factor that we talked about was the government contract, and as we move beyond that government contract to, you know, essentially our assumption is 100%, you know, commercial business in the fourth quarter, you know, we'll see higher pricing, which will obviously have a positive margin benefit.
Then there's a number of things, you know, as we think about the from a transitory standpoint that we talked about, like shipping costs. Eventually we're gonna transition from air shipment to sea shipment. Sea shipment's significantly cheaper. Also, we would expect that some of the logistical challenges that are being faced on a global basis, we would see cost reductions from a shipping standpoint going forward. Then there's a number of things from an efficiency standpoint that we're working on.
Lisa mentioned packaging configuration on the call, but there's other items that we have, you know, visibility to longer term. It's a huge area of focus for the organization, and there's a number of drivers we would expect to drive improvement, you know, as we go through the year and beyond.
Great. Thank you. Just as a follow-up, you guys said that you're seeing, I guess, an improved labor outlook. Can you just, I guess, give a little bit more color on that, what gives you confidence and given that the hiring environment is pretty tough right now? Thanks.
Yeah, Lizzie, the hiring environment remains tough, but I think we are making good progress. Overall, we've adjusted our approach to hiring and made our offers much more market competitive. In particular in Lehigh Valley, where we do most of the operations associated with IntelliSwab and our diagnostic products, it's been a very tight labor market due to the demand for both manufacturing and distribution jobs. We monitor that very closely. We just had a call about that today, and I think we're seeing an uptick in terms of responsiveness to our offers in filling key positions. That's what's driving our optimism overall there.
Great. Thanks for taking my questions.
Thank you.
Our next question comes from Andrew Cooper from Raymond James. Go ahead, Andrew.
Hi, everybody. Thanks for the questions here. Maybe first for Scott, you know, appreciate the color you've given on the gross margin. I guess, can you help us think a little bit more in terms of IntelliSwab about the timeline of some of these coming in? Obviously, we understand the government contract component, but some of the, you know, repack or reconfiguration of packaging efficiency items, can you give a sense for what throughout the year? When you made the comment about reaching, you know, at least two consolidated gross margin levels, was there a time frame associated with that? Is that exiting 4Q, or how do we think about what it takes to get there?
Yeah, Andrew, thanks for the question. You know, we're not providing specific guidance on any of the timelines there. You know, as we think about things that we talked about, you know, obviously the timing of the government contract, as you said, is known. I think in general, as we go through the year, as folks become trained and more efficient, as we our processes, you're gonna see a general trend towards efficiency.
Things like the shipping changes, you know, those, we have to strategically time those, and they're based on studies that have to be completed. You know, that's gonna be more of a 2023 phenomenon. Things like the packaging configuration also will be more 2022 general trend, we would expect you know to see improvements over time.
Okay. Helpful. Just one more from me, but you know, kinda taking this step back, it just feels like we spent, you know, more energy talking about where some of the innovations are in more clear color in terms of Colli-Pee and getting some FDA approvals in microbiome and things like that. With this new kinda split business structure, vertically integrated structure, how does that change, you know, maybe the way you're thinking about prioritization of R&D and innovation efforts and where that energy and effort is going?
Yeah, Andrew, thanks. Thanks for the question. I think it will only help the speed of innovation and our velocity moving from R&D to manufacturing and operations, and that's really what the vertical integration is really designed to do. In terms of investment in R&D, obviously those are viewed on a corporate basis, but both business units have the opportunity to make their case for their innovation pipeline and the impact on revenue and profitability over time. I think the new configuration actually helps innovation overall, and that's why, as you noted correctly, we've been talking much more about that over time.
Okay, great. I'll stop there. Thanks again.
Thank you.
We have no more questions at this time. I'll turn it back to the speakers for closing comments.
Wanna thank everyone for participating in today's call and for your continued interest in OraSure. We wish you a pleasant afternoon or evening. Stay safe and be well. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.