Welcome to the OraSure Technologies, Inc. 2021 Second Quarter Earnings Conference Call. My name is Adrian, and I'll be your operator for today's call. [Operator Instructions]. I'll now turn the call over to Scott Gleason, Head of Investor Relations at OraSure. Mr. Gleason, you may begin.

Thank you. Good afternoon, and welcome to OraSure Technologies' Second Quarter 2021 Earnings Call. I am Scott Gleason, the Senior Vice President of Investor Relations and Communications. Presenting for OraSure today are Dr. Stephen Tang, our President and Chief Executive Officer; and Roberto Cuca, our Chief Financial Officer. As a reminder, today's webcast is being recorded and a slide presentation accompanying the webcast can be found on the Investor Relations website. Before we begin, you should know that the 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, 2020, 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 solely based on information and available 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'm pleased to turn the call over to Dr. Stephen Tang.

Thanks, Scott, and thank you to everyone for joining our call today. This quarter, OraSure saw an exceptionally strong recovery in our core business. And excluding COVID-19 product revenue, we grew 122% year-over-year and 48% sequentially. And while we still have a ways to go, the beginning of the return to a more normal activity for our customers is a welcome sign as we look to the second half of fiscal year 2021. The strengthening of our core allowed us to achieve strong financial results despite the anticipated slowdown in Molecular Solutions COVID revenue as PCR test volumes declined in the U.S. This quarter, we also achieved a major milestone with the receipt of three Emergency Use Authorizations, EUAs. For our InteliSwab, COVID-19 rapid test in U.S., which we continue to believe will be a very important driver of incremental revenue and a source of growth for the company. The launch of our InteliSwab test demonstrates the ability of the company to develop, launch and market new products. And in the coming year, we will talk more about our renewed focus on innovation and our product pipeline as one of our strategic areas of focus. As we reflect on our strong quarterly results and our COVID-19 launches, I would like to personally thank OraSure's dedicated employees around the world who worked tirelessly to get us to this exciting point in our company's journey. I would now like to discuss our strategic priorities, which include capitalizing on the COVID-19 testing opportunities, expanding our sample collection and molecular services business into new sample types and testing modalities and expanding our global reach and driving innovation with a focus on achieving higher growth through both internal R&D and M&A. First, as we look at the COVID-19 testing opportunity, this quarter, we received 3…

Thanks, Steve. I'm happy to review our financial results for the second quarter. First, from the top line perspective, we delivered total revenue of $57.6 million in the second quarter of '21 compared to $29.3 million in the prior year, representing year-over-year growth of 97%. As a reminder, last year's second quarter was the most heavily impacted by the COVID-19 pandemic. However, as Steve previously noted, our core business, excluding COVID-19 product revenue grew 122% year-over-year and 48% sequentially this quarter, representing a significant recovery and demonstrating meeting aggressive key areas, such as domestic and international diagnostics, our consumer genomic sample kits and microbiome kits and services. Total diagnostic revenue in the quarter was $19.3 million versus $10.4 million in the previous year, reflecting 85% growth. Importantly, this quarter, we saw an improvement in domestic HIV, HCV and risk assessment testing revenue as we start to return to pre pandemic level. Our international diagnostics business saw 89% growth in the second quarter versus the prior year and grew 8% in the first half of 2021 when compared to 2020. This strong growth was achieved despite 2 important headwinds. First, there were expected changes in the Bill and Melinda Gates Foundation subsidy for our HIV self test, which have impacted revenue growth year-to-date. This subsidy ended June 30 this year, pursuant to the terms of our agreement with the foundation and has been taken downward for some time. In addition, as COVID-19 is now spiking across Africa with many major countries in lockdown, our NGO customers experienced in-country distribution challenges, which then caused delays in Q2 orders. Looking at our Molecular Solutions business. Total second quarter revenue was $38.3 million, increasing 103% versus the prior year. We saw a strong rebound in customer activity in the consumer and clinical genomics areas.…

Thanks, Roberto. As a company, we are an exciting point in our history and the progress we made from our fundamental perspective is beginning to become evident in our financial results. This quarter, we demonstrated decreasing strength of our core franchise with non COVID revenue of $46 million, representing almost a $200 million annual run rate. That would be a historic high for our total revenue. We have now entered the commercialization phase with InteliSwab. We remain confident then InteliSwab will be a significant driver of revenue growth and free cash flow and also a long-term product for the company as we ultimately enter the endemic phase of the disease. Our Molecular Solutions business is also increasingly strong footing as we build out new products and service capabilities, increasing the number of sample types we can accommodate and expand into new fields of testing and end-use markets growing in the mid-teens. Finally, we are invigorating our innovation engine of the company and look to introduce new technologies through internal R&D, external collaborations and M&A. Overall, we believe we are poised to emerge from the pandemic a stronger, more innovative and faster-growing company. And with that, I'd like to turn the call back to Scott for questions and answers.

Thanks, Steve. Operator, we're now ready to begin the Q&A portion of our call. We would ask that you limit your questions to one question and one follow-up to ensure a broad participation.

[Operator Instructions]. And our first question comes from Vijay Kumar from Evercore.

Congrats on the print here. And my first question on the guide here, Steve and Roberto. I guess the $30 million of antigen testing revenues, what is - what are you assuming for 2Q and Q4? If I look at your 3Q revenue guide of $45 million to $50 million, are they implied Q4 is about $65 million plus. If all of antigen revenues are flowing through in Q4, then the base, implied basis, $30, $35 ish, that seems to be a pretty dramatic dip line versus your pre pandemic level. So what is maybe just walk us through your second half assumptions between base versus COVID tailwinds?

Sure. Thanks for the question, Vijay. So I'll start off and then Steve can jump in. So as we mentioned in the prepared remarks, we expect that the preponderance of the $30 million in InteliSwab revenues in the second half of the year will occur in the fourth quarter. So given that, we haven't given exact guidance on how much we expect in the third and fourth quarter specifically. But you're right, there is a decline in the remainder of the business from the second to third quarters. The biggest driver of that decline is our lower COVID-19 molecular collection kit revenue expectations. As we stated in the prepared remarks, we've taken a conservative outlook based on current demand trends. And additionally, we're making some lower assumptions for some of the core products in diagnostics and Molecular Solutions, following strong growth in core demand in the second quarter, which could have been driven by restocking or initial distributor purchases or clinic purchasers. So we do expect to see a slightly lower third quarter than second quarter in some parts of the base business, definitely a step down in the molecular collection devices. And as we discussed in the prepared remarks, some of the challenges in the tech transfer of the InteliSwab manufacturing have delayed the availability of product, such that we'll see most of our InteliSwab sales for the year in the fourth quarter.

That's helpful, Roberto. And Steve, maybe one for you. Some recent articles on perhaps some other corporates or companies having OraSure. Now I know you don't comment on market speculation. But can you - the article didn't mention that OraSure has started a strategic review process. Can you tell us if you've started a strategic review process of the business?

Well, Vijay, I think, as you know, we wouldn't comment on the veracity of any rumors. And so we're going to stand by that.

Got you. And maybe one last one, if I could ask. Gross margins, maybe what is one-timer here in 2Q? And should second half be the low 50s Or should that normalize to 50-plus?

So the biggest driver of the step down year-on-year in gross profit percentage was the increase in our HIV international sales, which tend to be lower than the average of our gross profit percentage across the company, coupled with the decrease in the Bill and Melinda Gates foundation supplement to those revenues. As we see growth from InteliSwab over the course of the second half, which is likely to be a higher-margin product and which we're likely to get better pricing on as we get deeper into the year, we should see some movement in the gross profit percentage.

And our next question comes from Patrick Donnelly from Citi.

Just on the tech transfer issues impacting InteliSwab manufacturing. I thought you guys are already manufacturing at risk. So can you just talk to, I guess, when the problem arise? And also, I guess, the path to resolving it? Are you already through it? It sounds like, obviously, with 4Q being bigger, maybe we have a little bit to go here. But just talk through, I guess, the steps necessary to get us to that $55 million of manufacturing capacity or just some general higher capacity, what you guys are doing internally there?

Yes. Patrick, I'll start. So we have been increasing our capacity, as we've been sharing quarter-by-quarter. We currently have installed capacity to produce 55 million tests per year, and we're installing additional equipment to expand at 70 million tests per year in the quarter. Our current production, as we announced, will be significantly lower than that until we can result in transformation. We have been manufacturing at risk. The issues that we're facing are one of scale up, as we are getting more volume online and trying to address issues in increasing that scale. So these are situations we have seen before in other product launches. Fortunately, the InteliSwab design and platform is largely similar to our OraQuick HIV and HCV and Ebola platform. So we've seen this type of situation before. And so we're working to rapidly resolve that, which hopefully will open up more capacity in the fourth quarter.

Okay. That's helpful. And then I know you mentioned orders from, I think, 15 countries who kind of accept the EUA as approval. Can you talk about just broadly the opportunity OUS? What key markets are you still pursuing additional approvals in? Maybe just some time lines around the bigger ones that we should keep an eye out for?

Well, it's been - it's shifted, I think, as the pandemics has spiked in certain parts of the world. And so as you would expect, countries that accept the FDA EUA as part of the authorization to sell in their country and where the high risk in pandemic are spiking are clearly the ones in the greatest need right now. So that's where we're seeing the most interest in the hotspot countries, 15 that I mentioned that have the ability to accept the EUA. Beyond that, we're looking at broader geographical coverage, like the European Union. But quite frankly, we didn't expect interest this soon for our product. We thought primarily, this would be a domestic product, but it turns out the interest is purely global. So we're adjusting to that, and we're addressing those needs.

Okay. It's a good problem to have. So maybe last quick one, just on the long-term contracts on the sample corrections, encouraging to hear that you guys established some of those. I know competitive noise has been something you guys have talked about investors always asked about. So I mean, was this in response to that, any change in terms of the pricing we should think about? Or any metrics you can give us in terms of what percent of customers are locked in? I know you said there are some key large ones. So just trying to get a feel for what that looks like. Thank you.

Well, so we have not seen significant price changes in the consumer genomics area. I think what we're pleased to see is that it's a rebound of not only the commercial genomics, provide the academic genomics businesses. So we haven't announced what percentage of our revenue base, our customers are locked in per se, but it's a significant amount. And I think that the issues we had a few years ago with customer concentration are behind us. And so I think that it bodes well for the continued growth in the consumer genomics area.

Yes. I think, we said remember on the call that we had 6,000 total customers, it's really just the top ones that we have kind of the longer-term contracts with. But it's more about kind of the multiple strategies that we're engaged in, in terms of getting regulatory approvals in conjunction with the customers, expanding the IP portfolio. And so as all those factors kind of combined that we think build a very dependable position for that business.

And your next question comes from Frank Takkinen from Lake Street Capital.

Not sure if I heard it did get on the call a little bit late, but I was curious about the broader capacity expansion plans that were put in place last quarter. Have those changed at all-time line or size wise?

Frank, thanks for the question. So our capacity expansion plans as far as installed capacity remain on track. So we do expect to, for example, for InteliSwab, have installed capacity at the end of the third quarter of 70 million units per year. And again, that includes non COVID-19 applications of approximately 17 million units a year. And the majority of investment for all of our capacity expansion efforts is largely committed. So we do expect to continue the capacity expansions on the same track as we previously described.

Got it. Okay. That makes sense. And then I just wanted to ask a little bit more of a broader question about the base business, and it's not meant to pin you down on any forward-looking growth rates or anything of that nature, but just wanted to kind of level set everybody on how we should think about the base business. And there's obviously a lot of moving pieces there, but maybe you just talk a little bit through broadly how you think growth rates could look across infectious disease versus Molecular Solutions and maybe going to depth in some of your higher growth areas and some areas that you feel could produce some outsized growth and come a little bit under the spotlight as you look out over the back half of this year as well as into 2022.

Yes, Frank. So I'll start. I think as we highlighted on the call, we still see strong growth in international HIV. That was strong first half growth over last year. That continues to grow, particularly in a number of units outside the U.S. We have sold over 28 million HIV self-tests in 35 countries so far. So we expect that to continue. We're seeing renewed growth, as we talked about in the consumer genomics area. Particularly in disease risk management, companion animal and lifestyle areas. We talked about the fact that the microbiome franchise, which includes sample collection kits and services had a record quarter in their own right. And we had strong growth expectations for the microbiome business before the pandemic, and those look like they're continuing. So those are some of the areas that I would highlight. And obviously, we're just at the tip - in the beginning of the COVID-19 InteliSwab commercialization process. So that will be a growth driver as well.

And your next question comes from Brandon Couillard from Jefferies.

This is Matt in for Brandon. First one is just for Steve. Could you maybe talk a little bit about - since you got the test approved back in June, the evolution of your talks with customers or potential customers and thinking big retail players, academic education setting, which you've had success with your collection kits in the past, just where you're seeing the most interest and then talk about kind of the durability of that as we look into the back half of the year and into 2022?

Yes. Certainly, Matt. So the conversation specifically on InteliSwab have been very active, very robust. Many inbound inquiries a lot of those have to do with back-to-school and back-to-work programs overall. And of course, separately, the sample collection area for COVID-19 has a strong base of about the school programs as well. So those continue. I think that what we're seeing since we received our EUAs in June click is that we are kind of at the low point in testing from June 4 until today. And it's only in the past a week or so, where the concerns about the delta variant and testing not only in unvaccinated those of vaccinated people has come to the front. So we're seeing the pipeline increase over time. Now since the product launch, I think there's been clearly a focus on asymptomatic testing and serial testing. In other words, selling products that can be used to test a single person in one instance and then testing them again in 24 or 36 hours. That's going to become increasingly important to avoid quarantines and shutdowns. And so I think we've entered clearly a new phase of the pandemic, and that's driving great demand for InteliSwab. And as other products on the market are used and the differentiated quality of our product, which is ease of use, less than a minute of on hand's time for a customer to do the test itself. Those attributes are really going to be difference makers. So this is a dynamic market, and I think it's coming our way quickly, and we'll see that through the rest of the year. And I think we'll see an exit rate into 2022, which would be very favorable to us.

And our next question comes from Jacob Johnson from Stephens.

Maybe just one follow-up on the capacity side. Just on collection kit capacity, it sounds like from Roberto's comments, you're committed to still building this out. So can you just talk about the portion of that capacity that you need for non-COVID purposes, maybe what could drive the non COVID side higher as we look out a couple of years? And then if we see limited COVID-19 collection kit sales or maybe those sales remain limited in the near and medium term, what would the plans for that capacity ultimately be?

Thanks for the question, Jacob. Yes. So we remain on track with our molecular collections kits capacity expansion. And as you saw in this quarter, which was a quarter where the COVID-19 application of those collection kits decreased sequentially, the academic and commercial consumption of the kits increased. So we do think that there's pretty good elasticity between the two applications, and we continue to drive growth of both consumer and academic use of those kits. So we expect that to the extent that we're not using them for COVID-19, there will be other applications that we can put those kits to.

Got it. And then maybe for Steve, and just maybe kind of moving back to the non COVID side. On microbiome, obviously, a really strong quarter there, I guess, record quarter maybe. Can you just remind us of the microbiome assets that you have, their capabilities and kind of your outlook for that end market?

Sure, Jacob. So our microbiome assets include the sample collection kits as well as the service businesses, which we acquired a few years ago. So that's traded under the company named Diversigen. It actually is the merger of the Diversigen and CoreBiome assets, which we acquired separately a few years ago. So that's a company that has a cap certified laboratory, which essentially does the wet chemistry all the way through to the machine learning enabled data treatment to characterize what is in that microbiome sample. So it's the type and percentage of number of microbes in that sample. A lot of the work is being done in the gut microbiome area, but we're also moving into the skin microbiome and industrial hygiene areas. And so as we've stated on the call, we have a large customer base for that service business, the several top biopharmaceutical companies products moving into Phase III clinical trials. And so it's been a promising area for some time. And I think what we're starting to see is much more commercial activity on the services side, which coupled with the sample collection kits, I think, is going to be high-growth for us for the foreseeable future.

And our next question comes from Andrew Cooper from Raymond James.

Sorry about that, double mute. And appreciate the chance here. Maybe just first, I think the area of biggest differentiation versus our model was in that genomics space outside of COVID. We know there was a big promotion event late June. Is there anything to call out to think about in terms of moving from that? Was it just kind of broad-based growth or anything kind of one-time I should think about when we think sequentially in that genomic space?

So I'll start, Andrew, just nothing to call out. I think there is a normal seasonality. Our - both our product business and the royalties we received for the collection kits for consumer genomics is driven by events like Amazon Prime Day. So I think that's been the same for several years. Now Amazon Prime Day was different in 2020 than it was in 2021. So that could be a slight difference. But I don't think there's anything inherent to that. I think we're seeing overall strong demand, particularly as academic labs reopen and as people become more interested in their health and what we call disease risk management, which is the genetic link to disease. So nothing that I would call out. Roberto, do have anything else you want to add to that?

No. I think you've touched on everything. The key there is that there were no onetime events, it just represented organic growth.

Andrew, one thing I'd just highlight, when you look at that business from the kind of pre COVID numbers, if you go back to 2019, with 45%, which implies kind of a 20% CAGR. I think one trend you have seen as that business has become more diverse as we've had more customers. Obviously, with some consumer genomics headwinds for some time, I think the consumer genomics side, as you can see in the news, is starting to do a little bit better. And so I think we're kind of starting to see the growth there, the opportunity in the market kind of come through in the numbers as well.

Okay. Great. And maybe just one more kind of focused on InteliSwab. I like hearing the $25 million in inquiries you referenced, is there any sort of time frames you can put around what folks are looking at and how to think about that in context of talking about $30 million for the year and more 4Q loaded. Just how should we think about the duration of some of these conversations and what the structure might look like as they start to roll into the model and roll into the results?

Yes. So Andrew, I think overall, there is very strong demand. And I think it's because we're entering this new phase of the pandemic. So I think the forward-looking view to me is much more intense than the backward-looking view because the backward-looking view includes this low end testing in the second quarter for just about everybody. So I think as we get more serious about how we can avoid quarantines and shutdowns, the need for testing will become much more apparent. And the need for self-testing will become important on top of that. And then on top of that, the attributes of InteliSwab, which are its ease of use and the confidence that usually can have in the results, that will factor in as well. So that's the cost we have looking forward. Some of the opportunities that are coming in were so included in that $25 million pipeline that we talked about are near-term and some are longer term. And better yet, some are even short-term and long term, which suggests a reoccurring sales over time. So we haven't given specifics on that. But our pipeline is actually increasing week-over-week as the concerns about delta variant become very, very apparent.

And we have no further questions. I'll turn the call back over for final remarks.

Thank you, everyone, for joining us today, and we appreciate your participation in the call.

Thank you, ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.