Welcome. Day three, UBS Global Healthcare Conference. Pleased to be joined on stage with me, the senior management team of OraSure. My name is Brendan Brennan, and I cover tools, diagnostics, and pharma services. Before we start, I will direct you to the ubs.com website for all the relevant analyst disclaimer information. With me to my left is Steve Tang, President and CEO, and to his left is Roberto, and I apologize-
Cuca.
Cuca. I wanted to make sure I had that correct, who is the Chief Financial Officer. I think Steve is going to go through a series of slides, and then afterwards we will have a fireside with a series of questions, and by all means, if you are interested, raise your hand and I will try to weave your question into it. Without further ado, Steve.
Thank you, Dan. Good morning, everyone. Thanks for being here. I will just give you a brief introduction to OraSure Technologies before getting into the discussion. Can we have the next slide, please? No slide deck. Okay. It will be an even briefer discussion then. OraSure Technologies is a leader in two major sectors: point of care diagnostics for infectious disease globally and molecular solutions, which is primarily focused on our molecular collection systems. Thank you. Go to slide three then please from there. Thank you. Just a reminder, I will make forward-looking statements, so please see our SEC filings for a more fulsome description of risk and opportunity. As I said, we are a leader in two sectors, molecular sample collection. We have the only FDA-approved, 510(k)-cleared device for saliva collection for human genomic testing, which is used widely in the industry today.
We also have a series of microbiome products, which sample the gut microbiome, and preserve that sample for long periods of time at room temperature. We also have a franchise in HIV testing globally under our OraQuick brand name. We are the only World Health Organization pre-qualified product for rapid tests using saliva across the world, and that standard has been adopted through several initiatives to eradicate HIV around the world, and we will certainly be talking more about that. Our HCV test is also developed for a global market, and we are currently exploring ways to make that into a self-test as well. Our strategy is explicitly innovation-based growth by developing and acquiring new products and programs. Two recent acquisitions that we made, which we will be talking about, in January, CoreBiome, which is a microbiome services company, which pairs well with our sample collection capability.
Now we have the capability to deliver an end-to-end solution for researchers in the microbiome, and we intend to use our success in converting research and thought leadership into commercial opportunities as we have for consumer genomics. We have, over time, invested quite a bit in production capacity and to lowering our cost of goods sold across our product lines. And we have a very healthy balance sheet. At the end of the first quarter, we reported cash balances of $183 million with no debt. Last slide, please. Our first quarter results were very good. Our revenue exceeded consensus, and our EPS beat consensus. We had record performance in our microbiome market, revenue up 83% compared to first quarter of last year. That includes 30% increase in the sample kits themselves.
Year-over-year growth in genomics market, when you exclude the effect of a large customer, which we shared in our first quarter results, had changed their ordering pattern. Genomics sales increased over 200% in Asia, which we see as a viable growth market going forward. And our HIV global business is expected to show double-digit growth for the full-year as well. We also had good performance in our HCV business, both domestically and internationally, and I mentioned our cash balance. And for the first time ever, we provided full-year guidance, as well as second quarter guidance. Just to summarize, we see the growth drivers for double-digit growth this year in three areas. Our global HIV franchise, our microbiome sector, as well as consumer genomics without the effect of that one large customer. And with that, happy to discuss with you, Dan.
Great. Thanks, Steve. I thought we would maybe have one high-level question for you, and then we dig into each of the different businesses and maybe at the end, hit M&A. Maybe a high-level question. I think you've been with the company. Well, you've been CEO for a little over a year. I know you've been on the board for a longer period of time. Maybe could you discuss what your strategy, any changes that you've implemented, how do we think about OraSure under Steve versus the prior regime?
Sure. Roberto and I both have been with the company for a little over a year now. We've had some changes overall in the management team and our approach. Certainly hiring Roberto, hiring a senior vice president of business development, which will drive our acquisition activity. But we are laser-focused on execution as well, Dan. Our leadership position along the sectors I just described in infectious disease and molecular, that's a key part of our strategy. Broadening our offerings by either acquisition or internal development. Expanding our global franchise for HIV self-test and HCV. And then finally, in the area of microbiome, which I mentioned before, creating more of an end-to-end solution with acquisitions and broader capability. Leveraging the balance sheet for inorganic growth and leveraging execution for organic growth are the key focuses for us.
Starting with molecular collections. Obviously, the growth in prior years, in kind of recent years, was extremely robust, driven in part by, I think, the strength in maybe some of the U.S. DTC customer business. Now with that, you talked about changing customer ordering patterns. What can you provide or share insight on what is actually happening with some of those big customers, either your biggest one or some of the other big customers in the U.S.? How do we think about the impact this year and then kind of how, if we look out beyond 2019, what should that look like?
Yeah. It's interesting. We have now, I think, come forward in our first quarter earnings call and talked a little bit about how the sub-markets within consumer genomics are changing. We have identified two basic sectors. One is called ancestry, little A ancestry, and the other one's called disease risk assessment. In the first case of ancestry, this is where the large activity in the marketplace has been for the past two or three years, and that is primarily people interested in their genealogy. In that sector, what we've seen is that it is highly dependent on promotional advertising and discounting to drive growth. I think what you've seen over the past couple of months is a different approach by those players in those marketplaces to have less promotion, less advertising, and less discounting, which we believe will slow the growth in that marketplace.
Where we see stronger growth is in the disease risk management side, and that is looking at biomarkers for cancer screening and other disease risk factors. In fact, in that area, we saw growth over the past 12 months of our customers, in our top 20 customers, over 500%. These are companies like Invitae and Color Genomics, and more recently, Helix, that have gotten into these areas. They include large population studies, such as Helix has announced with Healthy Nevada, to look at 35,000 patients and become a model for use in other areas as well. That's the area that we're focusing on. There are other areas as well. There's lifestyle, there's companion pets. People taking DNA samples of their dogs and looking to duplicate that same genomic profile for other pets that they might have. Primarily right now, focused on a disease risk management sector.
Maybe just one word is on the core ancestry business. Obviously, there's still only a small percentage of Americans that have actually done the test. Is there an expectation, I mean, you probably don't have perfect visibility, but is there an expectation that, yeah, this year is a speed bump and things pull back, but yet there's still going to be continued growth in that market as we get beyond the back half of this year into 2020?
Yeah, I think it's true that a very small percentage of Americans have been tested so far, even for their genealogy. I do expect that to grow, but probably not at the same sort of blazing clip it's been for the last couple of years. Where we are really setting our sights is outside of the U.S. We believe the Asia-Pacific market is very viable for continued growth. It's probably about five years behind the U.S. market, though. We're already seeing tremendous growth, as I announced, over 200% increase year-on-year first quarter sales in Asia-Pacific. We're setting our sights globally as well.
What's kind of the lead lag with your business with some of these DTC customers? Like, a customer goes online, clicks it, they basically buy it. Ancestry, 23andMe, or one of the other companies basically takes that order. How do you recognize revenues versus when they're receiving orders? I'm just trying to get a lead lag.
Yeah. We will have sold into inventory for those customers ahead of that click by the ultimate end user.
Got it.
On the order of one to two quarters ahead of time.
Got it.
That said, a number of those customers have a number of different distribution channels. You can walk into a CVS or Walgreens and buy a kit today that's been in inventory for potentially more than a couple of quarters. You can also buy through Amazon or directly from those customers. Depending on the predominance of one or another channel, there are different lead times, but one to two quarters is about the average.
Okay. Then maybe, Steve, you talked about the OUS opportunity, five years behind. Just can you size your OUS molecular collections business today? Like how big it is relative and any color about the funnel or five years behind? Could that gap close? Because we also hear a lot from Illumina and others.
Yeah
about the proliferation of these testing companies, particularly in Asia right now.
We track our top 20 customers in a trailing 12-month basis. Two of those top 20 customers are in Asia, okay? One of them has performed particularly well, and they're actually beginning to sell outside of China, where they're based. We see early indicators that the market is growing, if not accelerating. That five-year difference, I think, in lag, I think, could be shorter.
Much more of the investment in the infrastructure has to be done in places like China. It's not possible to take human samples outside of China for analysis. You actually have to build the infrastructure within the country to do so. We have begun exploring ways of working with resident Chinese companies or even acquiring resident Chinese companies for that purpose.
Okay. Maybe one more on molecular collections. Can you discuss your competitive profile? Obviously, you're the leader right now. Just kind of give me some color on your IP situation and are there any other competitors trying to do the same type of approach that you are and are they having any success?
Yeah. We have, as I mentioned, we have the only 510(k) cleared FDA device for the collection of saliva for use in genomic testing. That's a device that if you've taken a 23andMe test, you're very familiar with. You spit in a tube, you close the cap, you send the tube in, et cetera. The remarkable thing about that is it stabilizes DNA at room temperature for several years. Okay. Its IP protection is along three dimensions. It's the design of the device, it's the actual device, and it's the chemistry to stabilize the DNA. Those patents run through the 2030s, so we're very confident about protection there. We've also been very successful in defending those patents. We reached a patent litigation settlement with AncestryDNA back in 2017, which provides us a royalty stream. We've actually actively defended the patents also in China as well.
We were very well aware that as you become more successful, more people try to emulate what you're doing, we just want to make sure that they are abiding by our patent. We'll continue to be vigilant in that area.
Okay. All right. Maybe we can always come back to hit molecular later, let's move over to HIV. Maybe can you start with outside the U.S., really step back and discuss what are the opportunities and trends for OUS HIV testing right now?
Yeah. We are part of a global consortium that resolved to eliminate HIV in our lifetime. The goal they set, it was out to 2030. It's the so-called 90-90-90 goals. Test 90% of the people. The people that are positive, treat 90% of them, and then 9% of those people, actually have them eradicate the virus, take the viral load down to zero. That effort began in 2017 with the Self Test in Africa program, which is called STAR, which we began to pilot in several countries. It was enabled by the Gates Foundation, their subsidy provided us to help scale our manufacturing process. The projection, according to the World Health Organization, is the number of HIV self-tests will increase from 1 million in 2017, which were virtually all of our tests, up to 16 million-19 million by 2020 and beyond.
By 2020, the corridor is that there'll be somewhere between 16 and 19 million tests sold per year. That includes a lot of things in that, but our self-test is predominant. We've had tremendous success in selling country by country. The Gates Foundation subsidy allows us to move into 50 countries around the world. Right now, we're registered in 15 of those countries. We have registrations pending for 17 more. Our expectation is we will ride that growth curve that I just projected from one to up to 19 million a year, 2020 and beyond.
What's the implicit number of tests you've baked into your guidance for 2019? Can you share that?
We have not shared that. As Steve said, we do expect that those WHO tests will be the majority of them this year, and more than 50% ongoing in future years.
Right. Have you disclosed the pricing on a test basis outside the U.S. under this program versus your, say, prices outside of the Gates Foundation and the STAR program, or even versus the U.S. pricing?
We have not.
No, assumingly, it has to be probably at a lower price given where you're delivering these tests.
Correct.
The history of the test, Dan, it's interesting because in order to obtain WHO pre-qualification, they required that the test be FDA approved and made in the U.S. That's a very high bar, obviously, from a quality and a performance perspective, but also from a cost perspective. That's why we needed the Gates subsidy to help ramp up the test, which was originally made for the U.S. professional and over-the-counter market.
What % of your OUS HIV business is coming from this area, from the STAR and Gates? Is it 100%, or is it the majority?
Well, the STAR program has actually effectively ended.
Okay.
that was a startup program.
Got it.
a startup funding. Now it's actually being paid for country by country.
Got it.
with the aid of NGOs.
Got it.
The majority of our OUS sales for HIV are devoted to the self-test programs.
Okay. Kind of in the U.S., I know here, this has been a state of decline. How have you baked in kind of the outlook for 2019, and how should we think about your U.S. HIV business going forward?
Yeah, we have had challenges in recent years because of more favorable reimbursement for blood-based testing. However, and this is unfortunate, the rise of the opioid epidemic has actually increased the prevalence of HIV and also HCV. If you look at the areas of the country where the opioid addiction challenge exists, they are in remote, rural areas. A lot of it's in the South. We believe the same fundamentals that allow us to be successful in sub-Saharan Africa will help us reach the unreachable, and test those people in those areas. The U.S. government has actually set aside funding to do so. There's $5 million in the budget for this year, and Congress is seeking up to $300 million for funding in 2020. We're optimistic about the role we can play in the president's initiative to eradicate HIV here in the U.S.
That business has been on what type of decline trajectory? Obviously, have you given any sense of the numbers or size of that opportunity in the U.S. and what that could do to the overall business?
It's been low single digits decline to flattish. We haven't given any indication of what we think the U.S. business individually will grow.
Right.
What we have said is that we expect that overall business, the OraQuick business, to grow double digits this year.
Got it. Okay. I'm going to stop right here. I have a series more questions. I'm going to scan the audience, see if anyone has any questions. Happy to entertain them. Okay, we'll keep going. Maybe we can move over to HCV. Obviously, another massive or very large OUS opportunity there.
Yeah.
At the same time, I know not too long ago, I think one of the larger opportunities, I think, canceled. Maybe just update us about the opportunity in your pipeline and kind of what you've assumed for 2019.
Sure. Within the U.S., I think as we've heard in first quarter, HCV results were favorable, a growth year-over-year. As I mentioned previously, within the U.S., the prevalence of HCV, which had previously been more limited to baby boomers, is now more prevalent because of the opioid epidemic. The use of injectable drugs has increased that risk here in the U.S. Part of the funding that's set aside for the opioid crisis is not only for HIV testing, but it's specifically for HCV testing as well. We see that as a favorable factor for us in the U.S. Outside the U.S., we believe there will eventually be worldwide eradication effort for HCV.
That has been largely enabled because the pharmaceutical companies who have made the cure for the U.S. market are now licensing that cure to generics across the world at a vastly discounted price. That allows countries that look at a public health challenge like HCV to then say, "We can actually cure HCV in our population, beginning with testing." To do so, we'll have to amass the same sort of political and economic power, or similar economic power to what we've seen in HIV eradication. The way we are preparing for that is to look for an HCV self-test analog in the same way we had an HIV self-test come to the market for HIV eradication. We're very optimistic, but that'll take a while, I think, to emerge in the marketplace.
I know that there is a country-by-country eradication process, and I think that you were involved in some potential bids. In the previous management, you used to discuss a pipeline of opportunity.
Yeah.
Can you just update us on kind of where that stands?
Yeah. We monitor the pipeline of opportunity well. What we are seeing is more organization country by country than commitments as yet. Our forecast is rather conservative in the near term for that, but we'll continue to update it as we see more viable opportunities.
kind of have you reframed what the size of the opportunity is? I know in the past, I think there were numbers given about how big, the numbers being similar to the 16-19 million tests on the HIV side. I think there were some sizing given on OUS HCV. Is that something that's still discussed so we can look at what the potential size of this revenue base could be?
We haven't updated of late, clearly HCV is a more prevalent and deadlier disease than HIV, most people don't fully appreciate that, there's a cure available for it.
Those three factors, I think, will increase the probability of these country-by-country eradication efforts, we have not forecasted them as yet.
Will there be a time in the future you think you'll be giving some more visibility, because it is such an attractive-
Yeah
potential revenue base for OraSure.
We will when we are confident of it, and when we can share with the marketplace.
Got it. Okay. All right, good. Maybe we could discuss, kind of switching gears to M&A. You mentioned at the beginning a couple of the recent deals that you did were really Novosanis and CoreBiome. Maybe can you discuss a little bit of color on these deals?
Sure.
You still have a strong balance sheet, and what's your plan going forward for capital deployment?
Sure. Both CoreBiome and Novosanis I would describe as tuck-in acquisitions for us.
Right.
We announced at the acquisition that they'll provide somewhere between $4 million and $7 million of incremental revenue to us this year. We see remarkable growth prospects for them beyond that. Okay? We'll give the guidance when we're ready to do so. CoreBiome, as I mentioned in my opening remarks, now gives us an end-to-end solution capability. We have the gold standard, as it's been described by others, for the collection of gut microbiome samples stabilized for several days that can be analyzed through the capability of CoreBiome and their machine learning algorithms to come to resolve. What you're looking for in a gut microbiome sample is a snapshot of the types of microbes and the amount of microbes in your stool sample. Okay, we can now give a readout on that.
Right now, the activity in the microbiome area is primarily researchers, both academic and commercial researchers. For instance, as drug companies begin to develop treatments for things like irritable bowel syndrome, Crohn's, and colitis, the role of the microbiome will need to be monitored over time. In fact, one of the reasons we acquired CoreBiome is that over 60% of their revenue comes from pharmaceutical companies. We see that as a strong underlying factor there. Novosanis makes a unique collection device for first void urine, which is very biomarker rich. It's different than the current urine collection kits which are on the marketplace, which require a great amount of hand-eye coordination, shall I say, to get the correct sample. This sort of takes that out of play.
The biomarkers that we're looking for are both cancer biomarkers, so the detection of biomarkers for prostate cancer and bladder cancer, but also more near term, sexually transmitted infections like human papillomavirus. We see that as a great companion to the other non-invasive sampling collection kits that we make for saliva, for stool, and for now urine.
On CoreBiome, where did that company's technology, where do they sit? It's a nascent field. There are other companies out there doing similar things. How do you view their positioning versus some of the other plays that are out there? I know in the past you've also sized that microbiome opportunity. How do we think about the opportunity and the pace of you being able to capture some of that over the next few years?
What we noticed is that the development of the microbiome market, which is people getting actual results back from microbiome samples, was limited by high-quality lab services and informatics, and that's what they provide. It's still a nascent market overall. We put a high premium on the scientific integrity of the company and its founders. It was founded at the University of Minnesota. There are three founders. Dan Knights is the lead thought leader there. Just as evidence of how strongly we believe in the science, Dan actually brought onto his advisory board Rob Knight, so we have Knights and Knight now, from the University of California San Diego, who is probably the premier thought leader in microbiome research. That tie to rigorous academic research and the potential to be the standard for lab services and informatics is the reason we acquired them.
We believe that'll be very scalable.
I think with that, Steve, we're out of time. Thank you both, Steve and Roberto, for being up here with us, and thank you all for joining us for this session.
Thanks.
Thanks, Dan.