Good afternoon, everyone, and welcome to the OraSure Technologies 2019 Second Quarter Financial Results Conference Call and Simultaneous Webcast. As a reminder, today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. [Operator instructions] OraSure Technologies issued a press release at approximately 4:00 p.m. Eastern Time today regarding its 2019 second quarter financial results and certain other matters. The press release is available on our website at www.orasure.com or by calling (610) 882-1820. If you go to our website, the press release can be found by opening the Investor Relations page and clicking on the link for press releases. With us today are Dr. Stephen Tang, President and Chief Executive Officer; and Mr. Roberto Cuca, Chief Financial Officer. Dr. Tang and Mr. Cuca will begin with opening statements, which will be followed with a question-and-answer session. Before I turn the call over to Dr. Tang, 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 results are discussed more fully in the Company's SEC filings, including its registration statements, its Annual Report on Form 10-K for the year ended December 31, 2018, its Quarterly Reports on Form 10-Q, and its other SEC filings. Although forward-looking statements help to provide complete 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 the call. With that, I would like to turn the call over to Dr. Stephen Tang.

Thank you, Jeanne. Good afternoon, everyone, and welcome to our call. Our second quarter revenues were lower than expected due in part to the changing dynamics of the consumer genomics market, and to the transient effect of an approximately $1 million delayed HIV self-test shipment that slipped into the third quarter. Nonetheless, we delivered a very strong bottom line for the second quarter of 2019. In addition, we continue to execute against our innovation-driven growth strategy with much attention focused on evaluating potential business development opportunities. Overall, and despite some headwinds in the consumer genomics market, we remain confident in our business. The opportunities before us are abundant and we are well positioned to execute against our strategic priorities. In past calls, we have described the market changes that are affecting the consumer genomics business as companies in that market are changing their approach to direct-to-consumer testing. These trends impacted our second quarter performance and will likely continue to evolve in the near-term. Nevertheless, the rest of our business remains largely on track. Outside of the single large customer, our consumer genomics business is healthy. It grew by strong double-digits in the second quarter, excluding that customer, and we still expect it to grow by double-digits for the full-year 2019 again, excluding that customer. The microbiome market remains a very bright spot with robust growth and enormous potential. We expect this revenue line to grow at double-digits in both organic sales and including the acquisition of CoreBiome over the full-year. The integration of our recent acquisitions, Novosanis and CoreBiome also continues to go well. CoreBiome in particular is helping to strengthen our microbiome business with recent customer wins for its cutting-edge laboratory and bioinformatic services. We have previously mentioned multiomics as an emerging approach to evaluating health that offers significant…

Thanks, Steve, and good afternoon, everyone. Our second quarter net revenues decreased 11% to $38.8 million from $43.6 million reported in the second quarter of 2018. Our net product and services revenues decreased 4% to $37.3 million compared to the prior year period. Our molecular net revenues, including other revenues, decreased 4% to $18.5 million in the second quarter, compared to $19.3 million in 2018. Royalty income declined 47% to $1.1 million in the second quarter of 2019 from $2.1 million in the same period of 2018 and showed only 3% growth from the immediately proceeding quarter versus 31% growth sequentially from the first quarter to second quarter of 2018. Molecular product revenues increased 1% to $17.3 million in the second quarter of 2019, compared to $17.2 million in the second quarter of 2018. Sales of our genomic products declined 7% to $14.2 million, largely due to lower customer demand, primarily from a large consumer genomics customer that changed its promotional strategy, which impacted its purchasing patterns. Notably, excluding the single customer, genomic product revenues grew over 20% compared to the second quarter of 2018. Microbiome sales increased 63% to $3 million from $1.8 million in the second quarter of last year due to the inclusion of lab services revenues generated by our newly acquired subsidiary CoreBiome as well as healthy double-digit organic growth. Domestic HIV sales decreased 14% to $4.5 million in the second quarter of 2019, compared to $5.2 million in the second quarter of 2018, largely due to lower sales of our professional product as a result of previously reported continued product and price competition and customer ordering patterns within the quarter. International HIV sales decreased 27% to $5.4 million from $7.4 million in the second quarter of 2018 due to customer ordering patterns and the slippage…

Thanks, Roberto. I’d like to continue with some further comments on our molecular business and then I will turn towards infectious disease. The human genomics markets continue to moderate since our last earnings call. Historically, ancestry testing has been the largest part of the human genomic market and a key driver of our business. Some of the larger players in this area have reduced the promotional support and change their business models to focus either on health offerings or therapeutic discovery and development. The high cost to compete in this consumer market has also in our view, negatively impacted the submarket. Although our business was specifically impacted by lower revenues from a large consumer genomics customer changing its promotional strategy and ordering patterns, we are now seeing additional consumer genomics customers reevaluating their business models in an effort to be more competitive. We see these ancestry submarket trends continuing for the foreseeable future. Nevertheless, other subsets of the genomics market are more robust with higher growth prospects, mainly in the area of disease risk management and companion animal in lifestyle testing. Disease risk management encompasses genetic tests that provide information about an individual's health risk, including an individual's predisposition to diseases such as cancer and carrier status. We continue to see a steady increase in the number of consumers in this area and expect the growth potential in future periods will be significant. In fact, during the second quarter, 15 of our top 20 customers based on a trailing 12-month revenues were in disease risk management submarket. And more than half of the 45 new commercial genomics customers added during the second quarter were in this category. We are now seeing more customers in the disease risk space moving to patient-initiated model where the test results are given back to…

[Operator Instructions] The first question comes from the line of Max Masucci from Canaccord. Your line is open.

Hi, good afternoon. So gross margins came in over 64% above where we were modeling despite 47% decrease in ancestry royalties, which come in at 100% gross margin. So can you just dive deeper into some of the drivers of the strong gross margins in the quarter and including some of the specific components of the product mix?

Sure. Thanks for the question, Max. So gross margin percentage for us is driven by mix at both the business unit level and then at the product level within business units and then at the customer level as well. So we've talked in the past about how larger customers with whom we have long-term supply agreements in exchange for the commitments that they provide for the longer-term purchasing, get some concessions on price. And as those larger customers buy smaller amounts from us during the period, our gross margin percentage will actually go up. So for example, we've also mentioned in the past that academic purchasers, which tend to buy in smaller volumes, pay at the higher end of the range of our pricing range. So that's one of the drivers is the shift amongst customers at – for example at the genomics business level. Another is we’ve stopped paying a royalty where we had an expiration of a royalty for some of our self-testing devices, that royalty expired around the middle of last year. So we're seeing the annualization of the benefit this year. And then we have also seen some benefit from COGS improvement projects, that have applied across the business, but have had particular impact in the OraQuick line of self-testing products.

Great. That's helpful. And next one on the guide, I guess, for Q3, what gives you confidence that your Q3 guide includes conservative enough assumptions to achieve at least the low-end of the guidance? Now we've seen growth rates bounce around in both your segments. I guess how would you judge your visibility into your different segments today compared to say a year-ago? And then if you could just parse out any specific assumptions embedded in the full-year guide? That'd be great. Thanks.

Sure. So the biggest drivers – so I'll start with the full-year. The biggest driver of the full-year decrease of $5 million from the prior range was really that ongoing softness in the consumer genomics business that a number of other participants in this market has been experiencing. That said, the way our orders come in the immediately next quarter is for obvious reasons, the one that we have the best visibility into. And typically at this point in the quarter, since we're already partway through the third quarter, we have a pretty good sense for what the orders are already under our belt and that will be going out towards the remainder of the quarter. So there's good reason for us to feel good about the third quarter and we believe that with the decrease that we've applied for the full-year, we've captured the remaining extent of the softness in that business for the back part of the year. I would point out one thing which is that as Steve mentioned during the prepared remarks, we did have an order that was slated to go out at the very end of June and would have been part of the second quarter. But that moved into the third quarter due to some shipping constraints to the tune of about $1 million. So that was one of the drivers of our results versus our prior second quarter guidance. We continue to monitor our shipping ability and stand top of those orders and expect that the risk of that has been minimized.

Great. And then one more, if I could squeeze one in. So total molecular collections, jumps over $7 million sequentially is a bit of a surprise to us. Can you help us understand just a sequential improvement and can you just touch on maybe the level of contribution from CoreBiome and Novosanis, I guess you said a different way. Can you help us understand what percentage of the 63% growth in microbiome revenues were contributed by CoreBiome and Novosanis? Thanks.

So Novasanis is not part of a microbiome, but CoreBiome is. So of the 63%, as we said, we got healthy double-digit growth just from the organic part of the business and then CoreBiome would have contributed to the remainder of that business. Another thing I'll point out as far as that growth in our molecular business, we did say at the beginning of the year that we expected to seek a contribution on the order of $4 million to $7 million in revenues from both CoreBiome and Novosanis together. Given the size of that revenue contribution and that they're both growing businesses. You would expect that that contribution will ramp up over the course of the year. And so you'll see more in the third and fourth quarters than you did in the first and second quarters. So some of that growth is what contributed to all such of the sequential growth for our molecular business.

Great. Thanks for taking the questions.

Thanks Max.

Our next question comes from the line of John Hsu from Raymond James. Your line is open.

Great. Thank you. I guess just going back to the guide for a second. Can you help us think about maybe the contribution for the large customer in the quarter, maybe the year-over-year headwind associated with that. And then just last one on with that large customer, are you still expecting them to track kind of closer to the annual minimum commitments that's inherent in the contract for this year?

So let me answer that second question first. So we do expect them to purchase to their annual minimum. As we pointed out in the past, and as we've cautioned in the past, their annual minimum is tied to their contract year, not to the calendar year. So they signed the agreement in November of 2017. So the annual minimum will apply to the November to November contract years. That said their next contract year's period also has an annual minimum. So depending on how they decided to distribute that in the next contract year, that could – some of that could come in December of this year or it could be timed out into more of next year. As far as how much of the revenues came in this quarter from that that major customer, when we release our Q, you'll see that 13% of our revenues for the quarter came from that single large customer.

Okay, great. That's very helpful. I guess just also on the bottom line, you actually came in better than we were looking for and obviously we’re able to raise on the bottom line despite lowering by $5 million on the topline. So I guess just within that – embedded within that, how are you thinking about the royalty contribution, net-net versus prior? It sounds like it could be a little bit weaker, but should we expect that to trends similar to the $1 million per quarter in the first half. Just any help on or color on that would be very helpful.

Sure. So we haven't provided any guidance specifically on our royalty expectations for the year. Although, as we did mention, the part of the $5 million reduction in our guidance is attributable to both the general consumer genomics and our expectations for the royalty associated with that. That said, one of the reasons for our ability to beat in this quarter and to improve our bottom line expectations for the year has to do with efficiency projects that we have ongoing, with some timing around R&D projects and business development projects. And just overall expectations for rate of things like hiring and investments across the business. But we continue to expect that we are investing into both R&D and sales marketing at rates that are appropriate to help us achieve our longer-term goals of double-digit revenue growth.

Okay, great. Thank you very much.

Thanks, John.

[Operator Instructions] We have a question from the line of Brandon Couillard from Jefferies. Your line is open.

Thanks. Good afternoon.

Hi, Brandon.

Roberto, I want to come back to the guidance for the full-year. It implies fourth quarter step-up of about 40% to 50% sequentially from your third quarter guidance. Could you just sort of speak to the level of confidence and visibility around that and what the key drivers of that sequential increase would be?

Certainly. So a couple of things. So as we've mentioned with regard to our International HIV Self-Testing program, we've experienced lumpiness in this year that isn't exactly replicating the lumpiness that we experienced last year. So part of what's driving that is our visibility into ordering around those tests that we expect to come in later in this year based in part on re-upping of programs that have already been put in place, and based in part on our insight to programs that are about to be initiated and guidance from ministries have helped around those. The second part is that, as we pointed out in the past in the consumer genomics market, much of the purchasing around that is done as gifts for the end of your holidays. And we do expect that notwithstanding a full year-over-year reduction in the amount of promotion and discounting that we understand to be being done by some of the larger players in that market. We still will be seeing that sort of seasonality – that sort of holiday associated buying later in the year.

If you could update us with the number of International HIV countries in which you have product registrations as well as those that are pending kind of looking for some of the KPIs are sort of leading indicators that we can point to that might backstop kind of your confidence in a stronger second half?

All right. Brandon, so you'll recall that the Bill & Melinda Gates Foundation creates eligibility for 50 countries in the world. We currently are registered in 15 countries. We have registrations pending in 17 more and we're pursuing many more. So if you're looking at it in terms of current penetration, 15 out of 50, and then a total of 34 either registered or in process to register against the 50. There's considerable upside against that agreement. And you may recall that there's also the STAR program, which somewhat overlaps with the Gates Foundation for 20 or 30 countries. And so we feel very strongly that we're getting traction in countries that we've already – we already have a presence. In my remarks, I said we're working about scaling towards bigger goals in those countries, but also broadly speaking across the world, we have a lot more opportunity for the Gates Foundation agreement.

Very good. Thank you.

Thanks, Brandon.

[Operator Instructions] That brings us to the end of the Q&A session of today's call. I will now turn the call over to Dr. Tang for closing remarks.

I want to thank you all for your participation on the call and your continued interest in OraSure. We wish you a happy afternoon and evening. Thank you.