Day, and thank you for standing by. Welcome to the OraSure Technologies Third Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising your hand is raised.
Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Scott Gleason, Head of Investor Relations. Go ahead, Scott.
Thanks, Shannon. Good afternoon, and welcome to OraSure Technologies' 3rd quarter 2022 earnings call. I'm Scott Gleason, the SVP of Investor Relations and Communications. Presenting with me today for Wersher is Kerry Eagleton Manor, our President and Chief Executive Officer and Ken McGrath, our Chief Financial Officer. As a reminder, today's webcast is being recorded and the recording can be found on our Investor Relations website.
Before we begin today, you should know 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 results are discussed more fully in the company's SEC filings, including its registration statements, its annual report on Form 10 ks for the year ended December 31, 2021, its quarterly reports on Form 10 Q and its other SEC filings. Although forward looking statements help to provide information about future prospects, listeners should keep in mind that forward looking statements are based solely on information available to management as of today. The company undertakes no obligation to update any forward looking statements to reflect events or circumstances after this call. Also today, we may discuss financial measures in accordance with GAAP and on a non GAAP basis.
We believe that non GAAP information is useful because it and enhance the understanding of our ongoing financial performance. We use non GAAP reporting internally to evaluate and manage our operations and we choose to provide this information because it allows for greater With respect to key metrics used by management and its financial and operational decision making and is used by Orchard's institutional investors for the analysis to help analyze the Health Forrester's business. A reconciliation of GAAP to non GAAP operating expenses can be found in the press release that was issued this afternoon, which is posted on the Investor Relations section of our website. With that, I'm pleased to turn the call over to Carrie.
Thanks, Scott, and thank you to everyone for joining today. We were really pleased to once again deliver strong results for the quarter. And Ken and I and our full team are highly focused on ensuring we achieve our financial targets, while providing increased transparency to investors. To that end, this quarter, We returned to both profitability and positive cash flow from operations ahead of our established guidance. This has been and remains our leadership team's primary focus as we work to strengthen our foundation of the organization.
We still have more work to do to ensure our long term financial success, and we are actively working on fiscal year 2023 with planned spending reductions, which and include aligning our cost structure to various scenarios within IntelliSwap. By doing this, we aim to ensure the company has a stable foundation from which to deploy the cash we expect to generate from COVID-nineteen sales in coming quarters to fund future growth investments. We will provide more details on this endeavor in our coming quarters as we finalize our planning for next fiscal year and beyond. To this end, we're continuing our transformation journey now and had a number of key learnings in the quarter. As we look to strengthen our foundation, we're putting in place Scenario plans to account for varying levels of IntelliSwab revenue in coming quarters while also working to leverage our new enterprise capabilities that we built ramping this test.
Examples of our organizational improvements include utilizing our super factory capabilities to increase production efficiency for our OraQuick platform and its assay card that is for HIV and HCV as well on our new automated equipment. We are also beginning to evaluate new complementary product offerings, expanded commercial channels and of course, Strategic Partnerships 2. Finally, as we develop greater visibility on our financial progress, we will begin to look at inorganic growth opportunities as well as our capital structure. Or and as I've shared before, the mantra underpinning our day to day operations of our strategic transformation are to innovate and operate with disciplined execution and accountability. And now I'm going to transition and provide some additional granularity on our business units beginning with our Diagnostic segment.
This quarter, there were 3 significant emerging themes within our diagnostics portfolio. The first was our expanded retail success with our IntelliSwap COVID-nineteen test, which could support a longer commercial tail for this product. 2nd, we saw the government Take an increasingly active role in global public health challenges with the Together, Take Me Home HIV testing program sponsored by the CDC, administered by Emory University as well as our new BARDA contract for Version 2 of our Ebola testing. And finally, we made progress on our efficiency journey as we look to improve our overall margin structure of the organization. As we focus on IntelliSwap, we had strong volume in Q3.
And as we discussed last quarter, we have received delivery orders from the U. S. Federal government, which allow it to order up to approximately 90,000,000 tests. As of the end of the Q3, we have fulfilled 30,000,000 of these orders And outside the federal government, we also had a number of other meaningful IntelliSwap wins. This quarter, we won a retail contract with a midsized Grocery store chain with the opportunity to be in up to 400 stores nationally.
We signed an employee testing contract with a top Fortune 500 company and we are currently available on walmart.com as well. And additionally, we signed a contract with amazon.com under which The retailer will carry and fulfill IntelliSwap orders from consumers. And given the improvements in our capacity, we are We are actively engaging potential customers in public health, government institutions and the retail settings, and we hope to have more positive developments as we continue to serve health needs through the upcoming respiratory virus events. Our second major theme That has emerged this quarter is Orashers' strong relationship with U. S.
Government agencies and the more active role we see our government taking in public health. Given the ease and simplicity of our test designs, we believe we are an ideal partner for outreach testing in critical diseases and the global pandemic has shown how the government can play a more active part in addressing public health crises. This trend is well demonstrated by our announcement this quarter that we will be supplying our OraQuick HIV in home test as part of the CDC's Together Take Me Home program, which will mail our HIV OTC kits to consumers requesting them, many of whom are in high risk or other vulnerable communities not well supported by the current health care system. The total program administered by Emory University This program has the potential to help grow our domestic HIV business and could serve as a case study for similar future programs in the U. S.
And other jurisdictions beyond. We were also awarded $8,600,000 from BARDA to develop a 2nd generation Ebola test with improved sensitivity and longer shelf life that will also be developed utilizing our automated super factory manufacturing process. Currently, Uganda and the Democratic Republic of Congo are experiencing significant Ebola outbreaks, and we have seen increased interest in procuring Ebola tests from several organizations. Finally, we continue to focus on production efficiency as we scale our super factory and plan for future volume scenarios around IntelliSwap. We have submitted our new packaging configuration to the U.
S. Student Drug Administration for approval and this new configuration is designed to reduce costs through lower material usage and due to its smaller size, with overall lower freight expense. If authorized, it will enable more efficient use of warehouse space internally and for our customers. We have also begun process development to transition our legacy HIV, HCV and Ebola products over to our new super factory automation, which will lead to labor savings and efficiencies as we consolidate around a single manufacturing process. To this point, we are reviewing our facility footprint and looking for areas where standardization across product lines can reduce our cost structure.
Finally, we are performing a top down review of our supplier agreements to also look for areas of material savings, including the possibility of bringing some of the more expensive raw material production in house. These efficiency programs will help on our journey to improving profitability and providing the cash flow for investments in the future. Next up, I'd like to discuss our commercial progress with our Molecular Solutions business unit. Beginning with our core collection kits. Our core kits business was down 24% this quarter on a year over year basis as we saw continued pressure from some of our more consumer focused customers.
We see this recent softness in the business as more transitory in nature as some of our more consumer oriented customers have delayed orders or brought down inventory levels given financial uncertainty. We remain optimistic, however, over the long term and the growth prospects for this segment and we're working very hard to add new significant customers in diagnostics and clinical lab services, which we know well to quickly accelerate our return to growth. To this end, we recently received an important new clearance for OraCollect DX from the U. S. FDA for general prescription and over the counter use.
OraSure received this designation to support alpha-one deficiency testing in patients who are symptomatic for chronic obstructive pulmonary disorder or maybe at risk for alpha-one deficiency. Of course, alpha-one deficiency raises patients' risks for lung disorders, and it's estimated that about 3% of the 15,000,000 COPD patients in the United States have alpha-one deficiency. Grifols, our partner, offers free alpha ID screening kits, supporting alpha-one deficiency screening that utilize our or a collect DX device. The partnership with Grifols represents valuable opportunity for us in addition and very important. This clearance also means that our OraGENE DX and OraCollect DX products may be used now at home By an adult without direction from a healthcare professional, when approved in conjunction with a partner or therapeutic partner therapeutic or device and without us having to obtain a separate new FDA approval.
We see more and more opportunities for cleared collection kits to be used in conjunction with drugs and devices as healthcare increasingly shifts towards precision medicine, where the need and opportunity here is to identify to target patient populations for targeted therapeutics. We also saw some positive developments in the microbiome testing space this quarter with our Diversigen subsidiary. 1st, revenue for the segments recovered as anticipated and was up 63% sequentially to $2,000,000 Secondly, we saw the 1st microbiome based therapeutic Receive the FDA's Vaccines and Related Biological Products Advisory Committee approval. Along with other drugs in the pipeline, There is the potential for multiple new biological license applications to be approved by the FDA in the coming year, which could be a strong catalyst for research funding. This quarter, we also announced a partnership with Mars PetCare to create The world's largest biobank around microbiome data for cats and dogs.
Samples collected As part of the Biobank study will be analyzed and Diversigen will sequence the DNA of the microorganisms in the sample. Marv Pet Care scientists will then use the data to generate insights about what cat and dog microbiomes look like over Including on health and disease. Like with our diagnostics portfolio, we are actively working on cost reductions and margin improvement We are currently looking at several opportunities to reduce material and logistics costs across our product lines and working on further integrating our Diversigen and Novosana subsidiaries to reduce expenses. Now, I'd like to turn the call over to Ken to provide a more detailed financial analysis of the quarter.
Thanks, Carrie. I'm pleased to discuss our financial results for the Q3 and provide updates on our financial outlook. First, from a top line perspective, we delivered total revenue of $116,500,000 in the 3rd quarter, which is another new record for the company, representing year over year growth of 116%. Our Diagnostic business unit delivered total revenue of $97,700,000 in the quarter, growing 3 15% versus last year. While the majority of this growth was driven by IntelliSwab, which increased over tenfold year over year.
Our core diagnostic business was up 14% in the quarter, largely due to non product revenue. Our Molecular Solutions business unit delivered revenue in the quarter of $18,800,000 and declined 38% relative to the Q3 of last year. Excluding COVID-nineteen revenue, the business declined 24%. And as Carrie mentioned earlier in the call, this was really tied to some increased softness in ordering from our more consumer oriented accounts, and we are working hard to change this paradigm as we look into 2023. With our COVID-nineteen collection kits, we saw continued declines as PCR test volumes declined at our commercial partners in favor of point of care testing solutions.
From a gross margin perspective, our non GAAP gross margin in the quarter was 40%, which was flat on a sequential basis. The sizable mix shift in revenue towards our Diagnostic business unit in the quarter created some margin headwinds with 84% of revenue in the quarter coming from diagnostics versus 75% last quarter. We continue to make plans to boost our longer term gross margin profile, including looking at packaging and standardization across products, moving our legacy test automation and site consolidation based on future volume contingencies. We will provide more details on our plans and outlook in the future as they come to fruition. Moving on to our operating expenses.
Our non GAAP operating expenses increased by $1,700,000 relative to our total non GAAP operating expenses in the 2nd quarter to a total of $35,300,000 The increased operating expenses in the quarter were tied to increased reserves. This quarter, we had a non cash impairment charge of $6,600,000 tied to the impairment of our manufacturing equipment associated with our COVID-nineteen molecular kits based upon our reduced volume forecast for these products. In the Q3, we generated Positive non GAAP operating income of $11,400,000 and non GAAP net income of 9,700,000 This translated to non GAAP earnings per share of $0.13 Importantly, we generated positive cash flow from operations in the quarter, ending the quarter with total cash of $102,000,000 We see a significant opportunity to generate meaningful cash flow in coming quarters as we continue to focus on operational efficiency and generate meaningful IntelliSwab revenue. Additionally, if IntelliSwab revenue is declining the future, Our cash position would benefit from significant reductions in working capital associated with our scale up in IntelliSwab revenue. As Carrie mentioned earlier in the call, however, we are committed to ensuring we have significant capital to invest
in the business in the future. To this
point, we are actively looking for further efficiencies across our organization as we complete the budget process for 2023. Given the current challenging capital market environment, we believe this puts us in the best position to succeed in the future and will allow us to make with targeted investments with attractive returns on invested capital, utilizing the cash we generated from COVID-nineteen products. We are providing 4th quarter financial guidance calling for revenue of $95,000,000 to $100,000,000 and representing 49% to 57% growth over Q4 of last year. The anticipated sequential decline in revenue is tied to our government procurement contract with the school testing program. We saw a number of large stocking orders by school districts as the school year began, leading to outsized revenue in the Q3.
As we move further into the school year, destocking orders have moderated. And consequently, we expect Intelliswap revenue to be lower on a sequential basis. Given our expectations of very high international diagnostic revenue, which is one of our lower margin business segments. It is possible we could see gross margins decline on a sequential basis in the 4th quarter and then return to the improvement trajectory in 2023 as we introduce additional operational efficiency programs. We continue to anticipate positive cash flow from operations in the 4th With that, I'm pleased to turn the call back over to Keri for concluding remarks.
Thanks, Ken. We continue to make significant progress on our transformation journey this quarter as the company focuses on innovating and operating with disciplined execution and accountability. We advanced again this quarter on our path to sustainable financial success as we returned to generating positive cash flow ahead of schedule and delivered on the increased scale up of our IntelliSwab manufacturing capacity. We believe that our capabilities can help power where healthcare is going, meeting people, patients where they are, providing innovation and care at the lowest possible level of acuity. We have the product, expertise and talent enabling the ongoing shift in healthcare.
Therefore, our focus going forward will increasingly look for ways to optimize our existing business through new innovation and partnerships as we move beyond strengthening our financial foundation. With that, I'm pleased to turn the call back over to Scott for Q and A.
Thanks, Carrie. Shannon, we're now ready to begin the Q and A portion of the call. We ask that you limit your questions to one question and one follow-up to ensure broad participation.
Thank you. At this time, we will conduct the question and answer session. Our first Question comes from Patrick Donnelly from Citi. Patrick, your line is open.
Hi. This is Lizzie on for Patrick Donnelly. First, congrats on the quarter and thank you for taking my question. Just on the Amazon partnership, Can you just talk a little bit more about the margin impact there when you expect to actually see that flow throughout the model? Just any further color there would be helpful.
Thank you. And I have one follow-up.
Thanks, Lizzie, and appreciate the question and your chime in. I'll just start and then maybe pass to Ken. But I'd say, One, we would call it a contract that makes Intellislav available. Like the retail opportunity, a Terrific retail opportunity, but that's in general, we have shared that that's actually a higher price, higher margin opportunity than the majority of our IntelliSwab business, which is government fulfilled. So, no real update to provide on timing except for that Yes.
Intellislav is available to order and we're expecting some consumer uptake, but I'd say that the potential there is actually at a higher price.
Yes, Carrie, I agree. And I think it's consistent with our other commercial business, as you mentioned. We don't give specific guidance on pricing and margins for that particular product line, But it is consistent with our other commercial pricing.
And I'd just add and at small as far as smaller volume.
Understood. Thank you. And then just one follow-up. I think the last earnings call, you said you had the capability to produce around 1,600,000 EntelliSwap tests per week and you expected this to double next year. Is that still the right way to think about it?
Thank you.
Yes. Lizzie, one thing to think about is we want to be as efficient as possible. And so one thing that we're looking at with the operations team in the company is really Yes, scaling Intelliswap to meet the demand levels and then also not scaling beyond that from a personnel standpoint Yes, because of the obviously the cost associated with that. And so right now our current capacity is around 2,000,000 tests a week from a production standpoint and we definitely have room to increase that further and will if necessary. But right now, we want to really Yes, we use our resources efficiently and so we're really scaling to meet demand as it comes in.
Appreciate it. Congrats, Kim.
Thank you. Thank you. Please standby. Our next question comes from Jacob Johnson from Stephens. Jacob, your line is open.
Hey, thanks. Good afternoon and congrats on a nice quarter. Maybe just a quick one for Ken first. On the guidance for 4Q, you talked about IntelliSwab sales Being down, but obviously kind of record quarter there in 3Q is maybe a way to think about it. You're guiding to revenue down $15,000,000 to $20,000,000 sequentially.
Is it fair to say maybe assume the base business is flat in 4Q and COVID is down by that much? Just any kind of color on how we should think about COVID revenues in 4Q.
Yes, I think you're thinking of it the right way. With our which we saw the ramp up in the school program in the beginning of the school year, We don't expect that to continue in Q4. So I think that's your thinking of it the correct way as far as the core business relates to that.
Okay. Thanks for that, Ken. And then, Carey, maybe kind of a higher level strategic question for you. You sell you have some products that go direct to consumer, you have others where you're selling to government agencies. And then you talked about Kind of on the collection kit side, working in North Labs, maybe the lines are blurring here to some degree Perfect.
As healthcare meets in the home, but I'd just be kind of curious your view of those various channels. And as we think about where Orchard is going, What do you find the most interesting within those avenues?
Thanks, Jacob. I love it because it allows us to talk about our different Folios and the different channels we serve within each. So I would just call out, our Our focus and our strength is effortless point of care diagnostic testing, effortless sample collection and stabilization innovation and effortless microbiome services and innovation. And the channels within that, what I want to highlight in answering your question is, On the sample collection and stabilization, we think there's a tremendous opportunity to increasingly power The connection of health care to people where they are and while that can sound consumer oriented, the types of Partners we're talking about serving as our customers are other health care providers. And so you pointed out clinical lab, it's also health tech.
And I think that opportunity has gained real momentum through COVID and people's awareness of The diagnostics and the solutions and the shift that is taking place. So I would just emphasize that. On the point of care diagnostic side, patients and consumers, that same trend serves to increase the shifts there as well. Though I would say, one of the benefits for us Through our COVID experience is really in relationship, not just with government, but public health more broadly. And so we keep kind of pointing out Government taking a more active role in serving public health needs.
So in addition to COVID, we really like the HIV example because the Together Take Me Home program is a different space, but represents kind of that same of government's involvement in improving care for the most vulnerable communities. So I think we're excited about each, but different product portfolios and strengths for different segments and channels we serve.
Got it. Super helpful. Thanks for taking the questions.
Thanks, Jacob. Thank you. Our next question comes from Casey Woodring from JPMorgan. Casey, your line is open.
Hi, guys. Thanks for taking my questions. I guess the first one is on gross margins. So it looks like they came in below the street and were flat quarter on quarter Despite some of the cost out initiatives that have already begun, I guess, can you maybe touch on how much runway there still is there in order to get cost out of the manufacturing And then you mentioned strength in retail for IntelliSwap in the quarter. Wouldn't that drive higher margins for IntelliSwap?
Yes. So I think you're calling out something we tried to share some of the nuance on gross margins. But while we don't provide specific gross margin percentages, there is this sort of balance between the two that I'll let Ken talk about.
Yes. No, you're right on, Casey, as far as the gross margin conversation. As far as long term, we are looking at opportunities to continue to improve our Operational efficiency, we have we're looking at footprint opportunities as well as versions updated versions of our COVID product, our TELUS Well product. As far as the gross margin versus expectations, Part of it, think of it as a mix as well. We had a higher diagnostic mix versus the prior quarter and the diagnostic margins are lower than our molecular margins overall and that mix, had some of the impact related to that.
In addition, I'll
Put it over to Scott if you want to add to that.
No, Ken. I think, yes, I think that's the primary factor Casey is, remember when we gave our guidance last quarter, we were guiding $90,000,000 to $95,000,000 in revenue and we had about $20,000,000 of additional revenue for IntelliSwap that was more than we had expected. And So just when you think about the mix impact, we did see a nice positive transition in Intelliswap margins again on a sequential basis, But some of that was absorbed obviously by the mix changes in the business. And so that will ebb and flow as Intelliswap No increases and decreases in our numbers going forward.
And I want to just circle back around to Casey's initial question, which is there is room and we do have plans to take out additional cost in IntelliSwap and beyond. And so there is additional room in gross margin for us to continue to improve.
Great.
That makes sense. And then I guess just on genomics, on the step down, last quarter you called out some weakness in the segment related to clinical trial work, specifically on some of the biotech funding concerns in that business. So curious if that also drove Part of the decline or was it all consumer? And then just on the consumer piece, wondering if you have any visibility into if That kind of trend in the business will improve at all in 4Q?
Yes. Thanks, Casey. On the On the BLA front and the microbiome services, we actually saw improvement there. So what we had shared is that we were Anticipating that there could be traction, traction which would help drive some positive signal, including research funding, and that did occur. And so we actually had improvement.
Some of the challenge, as you Correctly noted is clearly in the continued softness for our more consumer oriented businesses as well as in just the lack of COVID molecular testing across the board. So you listened well last quarter. We called it out, but the BLAs, we actually have progress there and progress in microbiome, But the softness remains we have long term optimism. We believe in the segment for genomics. So you fundamentally believe in it with the move to Precision Health, but there is still some financial uncertainty that remains and we see and players shifting inventory mix and making some moves like that.
And Stacy, I just wanted to be clear. Yes. When we look at some of the consumer partnerships that we announced on the call here for Intelliswap, some of the most of those were relatively recent from a timing standpoint such as Amazon. And so they wouldn't really have impacted the Q3 as well as you think about from a mix standpoint.
Got it. Very helpful. Thank you.
Thanks, Casey. Thank you. Our next question comes from Brandon Couillard at Jefferies. Brandon, your line is open.
Hi, thanks. This is Matt on for Brandon. Carrie, in your prepared remarks, you talked about how you're looking to align the cost structure across a number of scenarios as it relates to Teleswab demand looking out kind of into 2023 and you'll give us an update as we get there. But we would just love to get your higher level philosophy on that A little bit more maybe some of the key buckets and levers available to you as we kind of think about the various scenarios that could play out next year? Thanks.
Yes. Thanks, Matt. Clearly, footprint consolidation and optimization is a big one of those. If you just think about the operations that we have to support that. When we think about Cost structure and alignment with the business of today and tomorrow, one of the moves we had made earlier in the year was to centralize operations as a corporate function.
We had introduced Zach Wirt as our new SVP of Operations off to a terrific start. But really that manufacturing efficiency and that the footprint consolidation potential is a big part of that. I'd say another is in automation and really leveraging the potential for other products in our portfolio to leverage the super factory concept and automation and footprint consolidation. So if you think of that kind of big chunks, there's structural cost There are operating expense chunks and then there are cost of goods sold and unit cost reduction chunks and we're going after all three of those. Scott, Ken, anything you want to add on that?
Matt, anything else?
Yes. One other one. You talked about too about the new packaging you submitted to the FDA. Can you just give us an update on kind of what's the turnaround time for that and when it could maybe just Potentially start to ramp and then is there any way to quantify at a high level the impact to cost if you were able to switch over HIV, HCV, Ebola Business today on to that product kind of like how meaningful could this be to your cost structure today? Thanks.
Yes, Matt. It's always tough with the FDA to break time line. And so we're not really setting any kind of guidance around it. Yes, we've submitted the new configuration to them. And so we'll just have to see how long it takes them to respond to that, but it's something that we're excited about.
Yes. I think when you think about the transition of the other tests over to the new lines, there's definitely efficiencies. We're in the process right now of kind of scaling How significant those could be as we look at our production plans in our sites and the facilities that we utilize. So I think it's a little bit early to kind of give any type of cost estimates associated with that transition, but we believe it will be pretty meaningful for those tests as we make that transition in the future.
Super. Thank you.
Thanks, Matt.
Thank you. I would now like to turn it back to Scott and team for any closing remarks.
Thanks, Shannon, and we wanted to thank everybody for participating in today's call and your continued interest in Orasure. Have a great evening, stay safe and be well.
Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.