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JP Morgan 37th Annual Healthcare conference

Jan 10, 2019

Bob Rutkowski
Analyst, JPMorgan

Good morning, everyone. We're going to get started here. My name's Bob Rutkowski. I'm with JP Morgan's Healthcare Group. Thank you all for being here this morning. Just quick housekeeping, there will be a breakout session in the Olympic Room after this presentation. It's outside the hallways. If you make two lefts, you'll find it on the right side of the hallway. With that, it's my pleasure to welcome our next presenter, Steve Tang, CEO of OraSure Technologies.

Steve Tang
President and CEO, OraSure Technologies

Good morning, everyone. Thank you, Bob. As Bob said, I'm Steve Tang. I'm the President and CEO of OraSure Technologies. I'm delighted to be here with so many of my colleagues. Today, I'd like to share with you how we empower the global community to improve health and wellness by providing access to accurate and essential information. As I go through my presentation, please remember that our views of the future contain uncertainty and are subject to this forward-looking statement disclaimer. I refer you to our complete set of SEC filings for a more fulsome account of risks and uncertainties. I'd like to start by clearly stating our investment rationale. We are an industry leader in DNA, RNA, sample self-collection, stabilization, and preparation products, and in rapid point-of-care infectious disease testing. As you'll hear today, we see multiple growth drivers, many in the earliest stages of uptake and market growth.

Our molecular solutions and infectious disease diagnostic business platforms offer differentiated products with competitive profiles in attractive markets. We see tremendous growth potential in new products and services focused on the microbiome. Our primary focus includes leveraging our leadership position in molecular sample collection and stabilization devices, expanding into new infectious disease markets, and developing and acquiring new products and programs for large global opportunities. We're expanding our molecular offerings to provide our customers a comprehensive end-to-end solution that encompasses tools, diagnostics, and services. To optimize our performance, we continue to invest in manufacturing capacity and improve production efficiency for our major lines of businesses. Also key to our future is the robust balance sheet. We have a strong cash position with no debt and sustainable profitability, which facilitates our active business development program.

The identification, evaluation, and acquisition of new products and technologies is a key priority as we continue to build our company. Later in my presentation, I'll share with you the two recent exciting acquisitions that highlight our active business development efforts. We have two major lines of businesses. Our infectious disease division includes diagnostics for HIV, Hepatitis C, and Ebola, as well as sample optimization reagents for tuberculosis. The molecular solutions side includes tools and services for human genomics and the microbiome. As you'll hear later in my presentation, our new acquisitions advance our activities in the molecular area. We've identified key drivers of significant growth for both of these strategic pillars. Let's take a look, starting with infectious disease, where we have a 16-year track record of innovation and success. This track record began domestically with our OraQuick HIV test.

It continues through to our OraQuick In-Home HIV Test, the first and only rapid test approved for OTC use by the FDA. We turn our focus to enabling large-scale international opportunities with our HIV Self-Test. We've leveraged this platform to provide diagnostic solutions for Hepatitis C, or HCV as it's called, and Ebola. All these products are built on a proven and reliable lateral flow platform. This morning, I'll focus on HIV and HCV. Reliable, rapid testing quickly and easily lets infected individuals know their status. This enables them to be quickly linked to care, preventing transmission and ultimately saving lives. Our OraQuick HIV Self-Test is the first oral fluid HIV Self-Test pre-qualified by the World Health Organization, and our customers are using it to solve critical global health problems.

Nearly four decades since the AIDS crisis began, there are still over 36 million people living with HIV, and around a quarter of them are unaware that they're infected. Many of them are in low or middle income countries. In Africa, for example, where nearly one in every 25 adults is living with HIV. That's nearly two-thirds of the people living with HIV worldwide. OraSure has helped solve this public health and sociological challenge by enabling large testing programs that are designed to take HIV testing out of the clinic and into the communities. There, healthcare workers can find, educate, and test those individuals who are most at risk and least likely to seek out-of-clinic care. The OraQuick HIV Self-Test provides accurate results in 20 minutes. Its simplicity and ease of use is why it's been used to test millions of people.

We've sold over 50 million of our HIV tests for professional use, international Self-Test programs, and over-the-counter for consumer in-home testing. Scaling the eradication of HIV worldwide requires capable and innovative global partners. OraSure is fortunate to have partners with impeccable credentials. In 2017, we signed an agreement with the Bill and Melinda Gates Foundation to subsidize the cost of our Self-Test in 50 countries in Africa and Asia. Thanks to this subsidy, countries can afford to buy the test to pilot, validate, and scale large self-testing programs. We're also working with Unitaid, the funding organization which originated the Self-Testing Africa, or STAR program, and Population Services International, PSI. PSI is a world-renowned non-government organization with 8,000 employees and programs in 50 countries. STAR phase I deployed 750,000 units in three African countries, Zambia, Zimbabwe, and Malawi.

It generated crucial information about how to distribute HIV Self-Test products effectively, ethically, and efficiently. In 2017, the expanded STAR project launched with a commitment to deploy 4 million units across Malawi, Zambia, Zimbabwe, South Africa, Lesotho, and Swaziland. By November 2018, the STAR Initiative has distributed 2.3 million HIV Self-Test kits. It's estimated that 81% of people with HIV in sub-Saharan Africa are now aware of their status. That's up from 45% in 2014, just before the STAR Initiative began. There are an additional 44 countries that are still eligible for the Gates subsidy. There's additional market opportunity in other parts of the world as well. Interest in self-tests range from smaller pilot programs to higher volume screening programs in over 40 countries. In addition to sub-Saharan Africa, we're working with Latin America, Central Asia, and Eastern Europe.

In third quarter 2018, a majority of the purchases that we sold were outside of the STAR Initiative. Unitaid and WHO's 2018 report on HIV self-tests notes that the market for the global HIV self-test volumes are estimated to grow in a range which averages out to 16 million tests annually by the end of 2020, with the high end of that range reaching just over 19 million tests. On the domestic side, our OraQuick In-Home HIV Test is the first and only point-of-care HIV test with FDA approval for over-the-counter use. It's available online at retailers including Walgreens, CVS, Rite Aid, and Target. As we reported in our third quarter 2018 earnings call, our global HIV business delivered strong performance, with revenue growing 7% for the third quarter compared to the prior year.

We've leveraged the lateral flow platform to develop a rapid test for Hepatitis C, or HCV, as it's called. Globally, an estimated 71 million people have chronic Hepatitis C. The disease is responsible for more deaths in the U.S. than AIDS. In the U.S., the latest increase in Hepatitis C infection has been linked to the opioid crisis. The Centers for Disease Control has voiced the need for comprehensive community programs for opioid prevention that provide a range of testing, treatment, and prevention services for Hepatitis C and other infectious diseases, including HIV. HCV screening is a significant global opportunity for OraSure. Unlike HIV, where there's only long-term therapeutic care, HCV has a cure. Better yet for global public health, pharmaceutical companies like Gilead have licensed their technology to generic drug manufacturers to prevent affordable access to a cure for patients in the developing world.

As countries are able to access affordable treatment, they're examining how to implement screening programs to attack the HCV problem. Our OraQuick HCV product is well-positioned to support countrywide HCV elimination programs to screen, diagnose, and test and treat and cure HCV as they are developed and funded. These elimination programs are helping governments avoid the costly and significant morbidity and mortality costs associated with chronic Hepatitis C and end-of-life care. Moving on to molecular. We are the first mover and a market leader in developing and launching innovative products that provide reliable self-collection of high-quality samples for both genomics and the microbiome to enable research, diagnostic, and consumer genomic applications. Our molecular tools and services address the unmet need for sampling to analysis for molecular applications.

Our proven and scalable solutions enable healthcare workers and researchers alike to collect from donors in any setting, from the clinic to the field to the home. Over the past 14 years, we've launched a suite of products based on sound science that's guarded by broad and deep intellectual property protection. Some examples of our value and validity include more than 6,000 customers in over 100 countries that use our molecular products and approximately 3,000 peer-reviewed publications citing the use of our products. From a revenue perspective, we saw double-digit growth in the human genomics businesses, as well as triple-digit growth in the emerging microbiome business in third quarter 2018 as compared to the same period of the prior year. There remains a significant opportunity in these markets.

Not only are we seeing a growth in personalized genomics offerings, there's also increased funding and interest in the impact that the microbiome has in individual health and treatment response. As you'll hear in a moment, we're building on our core strengths in the areas of innovative tools and services to expand even deeper into the multi-omics and systems biology arena. Multi-omics provides a thorough, multifactorial examination of health. By examining all the omics, the genome, proteome, transcriptome, epigenome, and the microbiome, we can assess all aspects of what is in us, what's on us, and what's around us to inform our health. Multi-omics requires the ability to analyze and interpret massive data sets to extrapolate a comprehensive view of health and well-being. Human genome testing has grown rapidly over the past five years alone. It's now used to better understand and characterize thousands of conditions.

Since the completion of the Human Genome Project in 2003, there's been an explosion in the number of studies and discoveries surrounding genomics and their impact on health. Many of these discoveries are based on large-scale genome-wide association studies, which encompass thousands of subjects or patients. In 2011, OraSure acquired DNA Genotek, a Canadian startup company whose flagship product, Oragene, had revolutionized the DNA sample collection market. Through innovative R&D, DNA Genotek discovered a powerful chemistry that could stabilize DNA in saliva for years at room temperature. They married this chemical platform with an easy-to-use physical format that enables at-home collection and automated processing in the lab, addressing the challenge of large-scale sample access that genome-wide association studies and large cohort studies require. For the first time, the industry had a mechanism to collect large amounts of high-quality DNA through non-invasive sampling.

As Time Magazine put it, "A little Canadian company is doing for DNA collection what Google did for the web searches. It made it ridiculously simple and efficient." Let's take a look at the technology. All genomic analysis starts with the collection of DNA samples. Our flagship product, Oragene, pictured here, is the market leader for stabilizing human DNA for long periods of time at ambient temperature. Oragene incorporates proprietary physical design and stabilization solution. Our products are the only FDA 510(k) cleared devices for saliva DNA collection and stabilization, which is a significant feature that distinguishes us from the competition, and it's non-invasive. That means no finger sticks or needles. The main competition for OraSure remains blood samples, which requires a phlebotomist cold storage for the sample from collection to the lab.

Many people are surprised to learn that the quality of DNA stabilized in Oragene is comparable to that of blood. As one of our customers at Cincinnati Children's Hospital said, "This is a truly great product. I've tried many different chemistries to obtain DNA, and I've not seen a better compromise for yield, purity, time to extract, and ease of collection than Oragene." We are confident that our Oragene product line has been a key enabler for innovative genomic companies as they scale their businesses. Companies such as 23andMe and Helix are familiar to many and recognized as industry leaders. Oprah is a fan of dog DNA testing sold by one of our customers named Embark. She put it on her list of one of her favorite things for 2018. In late 2017, we signed a $143 million contract with one of the world's leading consumer genomics companies.

This contract contains minimum annual purchase obligations over several years. As genomic-based applications expand globally, our customers outside the U.S. are key to our continued revenue growth. Companies like WuXi NextCODE and WeGene, both from China, and Genesis Healthcare from Japan are examples of current OraSure customers who are thought leaders in the industry. We still believe we're still in the earliest stages of further market expansion. Markets in China, Japan, South Korea, and across Asia are in their infancy, which provides OraSure with even further opportunity to expand our global sales. We've seen phenomenal growth in our molecular business since we acquired DNA Genotek in 2011. Back then, it was a $12 million revenue business. In 2017, it grew to $75 million. That's not bad for a $50 million investment in 2011.

Strong revenue growth and an increased number of multi-year supply agreements with key accounts speak favorably for our line of Oragene saliva collection products. Now, even as saliva testing for human genomics expands rapidly, we're equally excited about the emerging microbiome market. Microbiome refers to the trillions of bacteria and other microorganisms that live in us or on our body. When we're healthy, we live in harmony with those microorganisms, which have been described as tiny hitchhikers that vary from person to person. These tiny hitchhikers are receiving an increased amount of attention. Researchers are now exploring the link between human health and the type and quantity of bacteria that's in us and on us. Unlike the human genome, which is stable throughout our life, our microbiome changes frequently. Researchers are now being funded to explore those changes and the implications for nutrition, disease, therapeutic interventions, lifestyle, and even longevity.

In particular, the gut microbiome is being studied to help treat diseases like Crohn's, colitis, and irritable bowel syndrome. Every major research university and medical center is exploring this area. We've leveraged our strength and knowledge in developing saliva collection and stabilization devices for the human genome. We translated this expertise to develop easy-to-use sample collection and stabilization technology for multiple sample types to snapshot the microbiome. With products for collecting and stabilizing gut, vaginal, and oral microbiome samples, we are now into the design and development stages of an OMNIgene device to collect microbiome samples from the skin. These products differ from our saliva-based human genome collection devices because they stabilize microbial DNA, not human DNA. Ensuring an accurate snapshot of the microbiome to capture community composition is critical to ensure consistency across samples and time.

There are millions of bacteria in each sample, unlike the single species from human DNA. You can imagine how novel and valuable our technology is for those studying the microbiome. Because the microbiome changes over time, sampling is not just a one-and-done proposition. In order to monitor the changes in the microbiome and the impact of treatments, multiple tests are needed over a period of time on the same individual. OMNIgene•GUT, our device for fecal samples, which is used to characterize the gut microbiome, is resonating in the market. To date, we have more than 700 customers for OMNIgene•GUT in 54 countries. The product is CE IVD marked for use in the European Union, and the business has grown from $600,000 in 2015 to $3 million in 2017, and revenues through the third quarter of 2018 were more than $4.7 million.

The human longevity study of the scientific journal, Nature, calls OMNIgene•GUT, "The gold standard for gut microbiome sample collection." This is high praise, and it validates a business strategy which we've already successfully deployed for our saliva-based collection devices in the human genome. As interest in the microbiome moves from research to clinical to consumer applications, we expect the addressable microbiome market to be as large as genomics or potentially larger. We consider the use cases for microbiome data are surfacing on a regular basis. This follows the same pattern we witnessed for saliva-based human genomics, which evolved from research to the rise of 23andMe and Helix and others.

Genomics was the first frontier, microbiome the next. Multi-omics is the final frontier, or at least until science provides further insights beyond proteomics and metabolomics as our best view of how human health and the human body responds to our genes and the environment around us. Broadly speaking, the markets we serve aim to understand the continuum of wellness through disease by profiling well-characterized patient populations with molecular techniques. Genomics has been hugely informative to this end. When you zoom out, you quickly realize that our 23,000 genes encode only a small fraction of our biochemical potential. Microbes, which colonize us inside and out, collectively encode 10 times more genetic and functional potential. Only recently has the scientific community developed the computational and wet lab tools to harness this relatively new branch of multi-omics.

The value of combining genomics in the microbiome is clearly evident by the fact that 40% of our microbiome customers were or are customers of our human genomic product line. We're well-positioned to capitalize on opportunities across multiple sample types and analytes, and from the existing Oragene and OMNIgene customers as they expand their research and offerings to incorporate more aspects of health through systems biology. This leads me to business development, where we are seeing exciting opportunities for OraSure. We're leveraging our powerful combination of our strong balance sheet, our focus strategy led by David Rappaport, the dedicated business development executive we added to the team in 2018. Simply stated, we expect our business development activities to enhance the company's long-term growth and profitability profile, which in turn we expect to provide attractive returns for our stockholders going forward.

This business development strategy is focused on identifying opportunities to license technology or acquire products or companies that complement or leverage our existing business to enhance our end-to-end service offerings. We expect these business development opportunities to advance our goal of being an innovation-driven company by adding differentiated products and services in high-end growth markets around the world. To that end, we're delighted to announce last week the acquisition of two companies, Novosanis and CoreBiome, both of which are expected to enhance our molecular business in years to come. Let me share a little color about each one of these acquisitions, which we believe will support our move to a tools, services, and diagnostic model. By marrying these deeper tool offerings with end-to-end services, we can support a multi-omics view of systems biology to inform health and wellness.

Novosanis is a privately held Belgian company which was founded in 2013 as a spinoff company out of the University of Antwerp. They are an early-stage commercial producer and distributor of urine sample collection devices. Their primary technology, Colli-Pee, is the only available easy-to-use device suited for the standardized collection of first-void urine in the privacy of a user's home or at a clinic. Colli-Pee offers significant competitive advantages to urine testing companies, including superior test performance, ease of use from both the collection and processing, and flexible customization options based on specific use case requirements. Its initial commercial application is as a collection device for liquid biopsy tests for the prostate and bladder cancer markets. Novosanis' urine collection technology expands our molecular collection portfolio and advances OraSure's expertise in non-invasive sample collection and stabilization.

Colli-Pee technology serves high-growth markets, including liquid biopsy and sexually transmitted infection diagnostics, where OraSure can leverage its existing intellectual property and brand and market expertise to deliver even more value to existing or new molecular customers. CoreBiome is a privately held Minnesota-based microbiome services provider that spun out of the University of Minnesota. It was co-founded in 2016 by domain experts in microbiome informatics, genomic methods, and clinical lab operations. Their proprietary technology provides fast, information-rich characterizations of microbiome diversity and function, paired with machine learning and expert analytics. It's an early-stage commercial company with customers in the pharmaceutical, agriculture, and research communities. CoreBiome leverages OraSure's leadership position in microbiome sample collection with end-to-end laboratory services that include sample processing, sequencing, and bioinformatics.

The acquisition positions OraSure to become a leading end-to-end solutions provider for researchers, direct-to-consumer companies, and therapeutic and diagnostic development customers all the way from sample to solution. We see powerful synergy from combining DNA Genotek's proprietary sampling and stabilization technology with CoreBiome's platform. We're very excited about this addition to OraSure's multi-omics story. These acquisitions are the first example of our innovation-driven growth strategy taking flight. They represent clear fits in our strategy to use business development to build upon our solid organic growth trends and enhance our long-term growth profile. Both these transactions were completed with modest initial cash outlay, and there's a potential for additional payments based on future performance.

We expect that the acquisitions will contribute from $4 million-$7 million in net revenue in 2019 and $0.03-$0.05 per share of dilution to non-GAAP earnings, excluding transaction costs and required acquisition and accounting adjustments. We expect these acquisitions to earn strong returns on invested capital over time. Importantly, these acquisitions represent initial steps in our long-term business development strategy. We look forward to announcing new opportunities in 2019 and beyond. In closing, these are exciting times for OraSure. The Novosanis and CoreBiome acquisitions are the initial results from our business development strategy. Significant growth opportunity exists in consumer genomics, microbiome and systems biology, and eradication programs for HIV and HCV. We will leverage our experience in tools, services, and diagnostics. Our core saliva genomics business remains central to our overall molecular strategy, and we intend to invest and grow in this key business.

We're expanding our product portfolio with new products that build on our core strengths in genomics and microbiome to move deeper into multi-omics and systems biology. We're also expanding our core HIV and HCV franchises globally through innovative testing and programs, new registrations, collaborations in our customers and other stakeholders. Beyond HCV and HIV, we intend to leverage our strengths and relationships with existing customers by expanding our portfolio with products synergistic with our existing ones. We look forward to updating you in the coming months on our progress towards these strategic goals, I'll let you read the summary later. Thank you very much.