Good afternoon, everyone and welcome to the OraSure Technologies 2019 Third Quarter Financial Results Conference Call and Simultaneous Webcast. As a reminder, today’s conference is being recorded. [Operator Instructions] OraSure Technologies issued a press release at approximately 4:00 p.m. Eastern Time today regarding its 2019 third 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 this call. With that, I would like to turn the call over to Dr. Stephen Tang.

Thank you, Jeanne. Good evening, everyone and welcome to our call. During today’s call, we would like to address two subjects that are most likely top of mind. The first is an update on the implementation of our innovation growth strategy, where I will outline our ongoing efforts to position Orasure to capitalize on some of the fastest-growing segments within the molecular and diagnostic markets. Secondly, we will break down our financial performance for the third quarter and provide updated guidance. The information we share today will provide context and demonstrate that our business is largely on track with the exception of consumer genomics. The announcement earlier today that we have signed an agreement to acquire Diversigen is yet another example of the progress we’re making in executing our growth strategy. Diversigen is an exceptional company and a proven leader in the microbiome laboratory and analytic services industry. This acquisition will further strengthen our microbiome business and improve our ability to provide customers with industry-leading end-to-end microbiome products and service offerings. With over $200 million in cash on the balance sheet as of the end of the third quarter, we are well-positioned to make further additions to the company. We believe OraSure is at the forefront of several nascent but large growth opportunities. Another recent strategic step was the sale of our cryosurgery systems business, which we announced in August. The divestiture really has allowed us to shed non-strategic business line, prioritize our product portfolio and refocus our resources on growing our core molecular solutions and infectious disease businesses. Turning to the quarter, as I said the trends we have outlined on prior calls, particularly those affecting the consumer genomics market continue to impact our business. Overall, however, our business continues to perform largely as expected. Revenues came in a…

Thanks, Steve and good evening everyone. Our third quarter net revenues decreased 22% to $36 million from $45.9 million reported in the third quarter of 2018. Our net product and services revenues decreased 19% to $35.3 million compared to the prior year period. Our molecular net revenues, including other revenues, decreased 31% to $18.3 million in the third quarter compared to $26.6 million in 2018. Royalty income declined 33% to $758,000 in the third quarter of 2019 from $1.1 million in the same period of 2018. This also represents sequential declines in the second quarter of 2019 of 32% versus a 46% sequential decline from the second quarter to the third quarter of 2018. Molecular product revenues decreased 32% to $17.4 million in the third quarter of 2019 compared to $25.5 million in the third quarter of 2018. Sales of our genomic products declined 41% to $14.1 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 this single customer, genomic product revenues grew 30% compared to the third quarter of 2018. Microbiome sales increased 81% to $3.1 million from $1.7 million in the third quarter of last year, primarily due to the inclusion of lab services revenues generated by our newly acquired subsidiary of CoreBiome, but also from healthy double-digit organic growth. Domestic HIV sales decreased 4% to $4.3 million in the third quarter of 2019 compared to $4.5 million in the third quarter of 2018, largely due to lower sales of our over-the-counter product. International HIV sales increased 36% to $5.9 million from $4.3 million in the third quarter of 2018 due to higher sales of our HIV Self-Test into Africa, notwithstanding the shipping challenges with three international orders that Steve described.…

Thanks, Roberto. I will first focus on our molecular solutions business. As mentioned in my opening remarks and in Roberto’s report both the positive and negative trends that impact our genomics business are continuing. On the one hand, we see many signs of growth in our genomics business despite the impact of a single large consumer genomics customer. Product revenues, excluding this one customer, were up 30% in the third quarter compared to 2018. We are also seeing consistent growth in a number of new commercial genomics customers being added to our business. Importantly, we continue to see growth in the number of disease risk management companies adopting our FDA cleared collection devices for clinical applications. Overall, there seems to be an uptick in the use of FDA-cleared devices and platforms in the genomics testing market. We believe this is being driven at least in part by the FDA’s efforts to enforce the need for using clear devices in clinical genomic testing applications. As we have shared in the past, we have an active regulatory program to bolster our global growth. We are also actively working with several customers to obtain FDA clearance for their tests. This type of collaboration is important and that it strengthens our regulatory position and deepens our relationships with emerging clinical test providers. Despite the underlying strength in much of genomics, the ancestry or genealogy testing segment within the consumer genomics market continues to decline and is impacting our product revenues and royalty income. As we have noticed in previous calls, over time, we expect that other submarkets within genetic testing, most notably, disease risk management, augmented by animal health and lifestyle genomics will eventually offset these declines. So in summary, despite the challenges in this consumer genomics market, we continue to believe that our…

[Operator Instructions] Your first question comes from Brandon Couillard from Jefferies.

Hey thanks. Good afternoon, Roberto. Maybe start with you. Just in terms of the guidance, I mean, you came out in mid-August and kind of pointed to the $160 million to $165 million revenue for the year now kind of lowering that range by about $10 million or so. Could you sort of articulate, what exactly has changed? I mean, I know you spoke to the one HIV self-test that order that got pushed out of the fourth quarter, but help us sort of understand the moving parts in the business as it’s transpired over the last 2 months? And then also, if you could help us bridge the delta in the EPS guidance range relative to the figure you put out in mid-August?

Sure. So I’ll start with the EPS range. So that’s pretty much a direct result of the change in the revenue forecast with a little bit of cost savings in the back part of the year. So there is nothing – there is nothing hidden in there really is just the revenues. As far as the change in the revenue guidance, the $10-or-so million of production as we said, a small part of that was an order – a larger order in HIV Self-Test international, the remainder, though, is in the consumer genomics business. And as we said in the prepared remarks that DOJ initiative which didn’t – which occurred in the third quarter, but didn’t affect our third quarter sales has, based on our conversations with customers is likely to affect the fourth quarter. And additionally, we’re seeing just in general, greater overhang in that business. And so the general business all around the DOJ business, the DOJ affected business has come down.

Got it. And then if you could sort of share with us what you’re embedding for the DNA Genotek business in the fourth quarter? And as you look out to next year, assuming that one large customer kind of only maintains their minimum orders as they have through this year, should we expect that business to maybe return to double-digit growth, as you’ve kind of articulated it being at least through the third quarter?

So as you pointed out, we did say that our guidance for the year included an assumption that, that business would – that the largest company would – largest customer would order at their contractual minimums for the year. If they do continue to order at the contractual minimums next year, that large part of the business is likely to be flattish. And so the question then is what happens with the remainder of the business? As we pointed out, through the third quarter of this year excluding that largest customer, we did see pretty healthy double-digit revenue growth from the other parts of the business. And we have often pointed to disease risk management as a source for that growth and our expectation that, that will be a continued source for growth. So we would consider – we would expect to still see outside of that one big customer growth particularly driven by that disease risk management business. The question is, would they together average to more than double digits, and we haven’t provided guidance on that. We have said, though, that disease risk management is a smaller part of the business right now.

Sorry. And then any color you can share in terms of the moving parts on the fourth quarter guide, which does imply about a $10 million step-up sequentially?

So the continued growth that we see sequentially or we expect to see is the traditional seasonality in the consumer genomics business that’s driven by how they gift-giving around the end of the year. If you do some Internet searches, you’ll see that there’s a lot of advertising going on in support of that even still this year. And that may actually be a bit more – there may be a bit more investment into that than we otherwise would have expected, given that one of the – the 2 largest players in that space has put out a new offering. The other thing that as it drives our expectation of the step-up in the fourth quarter over the third quarter is, as we pointed out, we did get 2 additional country approvals in Africa for sales of our products. I think every quarter, we list the number of countries that we’ve had approved and the number that we have pending. As Steve mentioned, Nigeria was one of those big countries. And as we’ve described in the past, when a country issues approval for – registration approval and begins eradication program initiatives, they typically start with a large stocking order and then move to a smaller sustaining refilling orders. So given the timing of that approval – the Nigerian approval, we do expect that their first order will be coming in, in the fourth quarter – will be delivered in the fourth quarter.

Got it. I will follow the rules and jump back in the queue. Thanks.

Thanks.

[Operator Instructions] Your next question comes from John Hsu from Raymond James.

Good afternoon. If you could just stay on the fourth quarter guide for a second, just to be clear, you mentioned Nigeria, you expect initial order in the fourth quarter and then Uganda, I believe, shipments as well. But you also talked about this dynamic where the lead times have lengthened a bit. So I guess, could you help us think about is, how risk-adjusted the fourth quarter guide is for those dynamics specifically?

Yes. So we’re in discussion with ministries of health about their eradication programs and plans before they issued the regulatory approval for the product. So we have our plans in place. They have purchase orders ready to go. So notwithstanding that this is a non-STAR program country and so uses a different ordering pathway. We did actually have a reasonable amount of visibility into both of those programs orders. So we believe that there’s lower risk of slippage, although there’s always some, but we’ve essentially begun working on those orders even already. So the risk around those two orders is actually a bit less than the risk of the order that slipped from the fourth quarter into the first quarter of next year where that Ministry of Health has not fully completed the order process.

Okay. Then on the SAMSA guidelines, it sounds like that’s a pretty nice opportunity for you. Just to be clear, is there any work that needs to be done for you to participate in that market? If so, when do you expect to be, I guess, game ready to address that opportunity?

Yes, John, I think it is a big opportunity for us. I think, typically, drugs abuse testing is done with urine sample today and those urine samples, unfortunately, have been subject to a dollaration, and the chain of the custody of samples is always a difficult challenge. So using oral fluids makes compliance and the chain of custody, much easier and tighter. And for us, it’s developing the collection device and then coupling it with assays. And as I mentioned in my remarks, we’re working with Thermo Fisher to develop those assays. So the timeline for implementation is set to begin January 1, 2020, and run 18 to 24 months. And so we’ll be working with Thermo on those assays which we believe will give us a strong competitive position in the marketplace to capitalize on this beginning in 2021 mid-year and beyond.

Okay, great. And then last one, just on the Diversigen, could you maybe expand a little bit on the strategic benefits and then Roberto, anything you can share with us regarding financial impact in the near term?

Sure. I think it’s clear that with Diversigen, it will help enhance OraSure’s standing as a microbiome service market leader by combining the capabilities with CoreBiome. It’s really a great combination of diverses and track record. And in particular, the customer focus, 90% of their customers are pharma companies they clearly have been cultivating the customer relationships for a long period of time and because they got into the market 3 years before CoreBiome, their sales and marketing, as you would expect, is a bit more mature. Having said that, CoreBiome’s technical innovation and analysis and DNA Genotek’s sampling kits give us and our customers now industry-leading workflows that’s been sampling to the actual result or statistics that we deliver to the customer. So we’re essentially uniting the pioneers and the people who’re charting a path in the future by these 2 great founding organizations, one founded by Denise at CoreBiome and the other by Joe Petrosino at Diversigen. So this – from our perspective, creates for us the opportunity to become the premier provider of microbiome services in the industry as it scales, that means higher throughput, higher complexity, faster turnaround, bigger data sets, and increased regulatory scrutiny. Those are all the defining factors of our competitive advantage.

And John, on the financial impacts, we expect that for the full year, including the part of the year for which we didn’t own them, they will have revenues on the order of both CoreBiome and NovoSanis combined for 2019. But because we’ll only be owning them for about 7 weeks of the year, the effect on our P&L will be nominal on the revenue line and the bottom line. But as a reminder, as we’ve said about our acquisition strategy in general, we target companies that will be accretive to our growth rate. So those revenues are things – are revenues that we expect to grow faster than the average of the existing company today.

Great. Thank you so much.

Thank you John

Your next question comes from Brandon Couillard from Jefferies.

Already. Just had a question about Ancestry, they’re launching a new health service with Quest using saliva. Just curious if you can confirm whether or not, that product is a spicket from DNA Genotek or it is actually includes a royalty? I know you’ve had some litigation with them related to a new service offering that they were planning on launching? Any color you can share with us on that?

Well, as far as we know, if they continue to use the device that they currently use in the marketplace. Which relies on our patents, and they’ll continue to pay royalty to us. We do not yet have any visibility on any new kits, they may be offering for commercialization. And obviously, our settlement with them from 2017 has a provision for arbitration, as you mentioned, and we believe we’ll get a decision on that sometime in 2020.

And to be clear, Brandon, they do not use our DNA Genotek spicket, but the kit that they have been using to date is one that’s subject to the royalty that we settled under our agreement with them.

Okay. And then on Diversigen, the earn-out. Just curious why it’s tied to 2019 revenues rather than 2020? And then secondly, the contingent consideration reversal in the quarter. Does that mean they’re suggested CoreBiome and Novosanis maybe aren’t ramping to deal models?

So on the first issue, I think what we were looking for is, firmness in revenue for 2019 for Diversigen, which has embedded in a number of customer relationships, which we believe will be scalable into 2020. And so having that assurance for 2019 was very important to us. And as Roberto was saying, we believe that they will grow in the short and the long-term remarkably.

And with regard to the contingent consideration change, so that is tied to revised forecasts for the two acquisitions, one or both of them. We haven’t disclosed which. And as a reminder, there are payouts associated with both 2019 and 2020 with 1 or more of those company acquisitions. But yes, the revision to the forecast is what drove those revaluations for the contingent consideration.

Super. Thank you.

I am showing no further questions at this time. That brings to an end to the Q&A session of today’s call. I will now turn the call over to Dr. Tang for closing remarks.

Well, we thank you very much for participating in today’s call and for your continued interest in OraSure. Have a pleasant afternoon, and evening. Thank you.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day. You may now disconnect.